Federal Reserve officials are expected to announce their third and final interest rate cut of 2024 on Wednesday, but investors will be keenly focused on something else: where they see policy heading in 2025.
Central bankers are scheduled to release their latest economic projections since September alongside their 2 p.m. rate decision. Some economists think that the officials could reduce how many rate cuts they expect to make next year in light of recent sticky inflation and strong economic growth.
Jerome H. Powell, the Fed chair, is also set to give a news conference at 2:30 p.m., and Wall Street will hang on his every word for a hint at what policymakers are thinking.
The Fed’s December meeting is often a market-moving affair that sets the tone for the next year, so this week’s gathering is sure to be carefully watched. Here’s what to know.
Pay attention to the plot.
The central bank will release a fresh Summary of Economic Projections after this meeting, including the closely watched “dot plot,” which shows how much officials expect to lower interest rates in coming years. (It arrays their anonymous projections as baby blue dots on a chart, hence the name.)
Rates are now set to about 4.6 percent, and will close out the year at about 4.4 percent if the Fed makes a quarter-point rate cut at this meeting, as expected.
While policymakers had previously forecast four rate cuts over the course of 2025, the economy has surprised them since September.
Growth has been strong and the labor market is holding up, suggesting that the economy can withstand rates at relatively high levels without cracking. Inflation has also been a little bit more stubborn than officials had expected: It is much cooler than at its peak in 2022, but it remains stuck above the Fed’s 2 percent target.
That could suggest that interest rate policy needs to enter a new phase.
The Fed raised rates in 2022 and 2023 to bring inflation under control by making it expensive to borrow money, which saps demand from the economy. Policymakers then began to cut borrowing costs in September because inflation was coming back to their goal level and the unemployment rate was ticking up.
But if those trends are changing, the shift in conditions could argue for a slower pace of rate cuts going forward. That’s why investors will be watching the dots this week: If Fed officials project just three cuts next year, or even two, it would be a sign that they are planning to hit pause at some point in the near future.
All eyes on the Fed chair.
Mr. Powell could also provide details into the Fed’s thinking during his news conference. While the Fed chair is just one of 12 votes on interest rate decisions, he has outsize influence because he leads the committee and markets react most strongly to his remarks.
In recent weeks, Mr. Powell has suggested that the economy is in a good place — even growing much more robustly than many of its global peers — but that officials are keeping a close eye on price increases as they contemplate the path ahead.
“Growth is definitely stronger than we thought, and inflation is coming a little higher,” Mr. Powell said this month at a New York Times conference. “The good news is that we can afford to be a little more cautious as we try to find neutral.”
Still hitting the brakes?
As policymakers try to figure out how much and how quickly to lower interest rates next year, they are facing a nerdy but critical question: What is the level of interest rates that marks the dividing line between tight policy (which slows the economy down) and easy policy (which speeds it up)?
Guessing that magic number, often called the “neutral rate,” is always fraught. But it has been especially tricky since the pandemic, because the economy has been changing rapidly.
In particular, productivity seems to be picking up. If that persists, it could mean that the economy can grow rapidly without causing inflation, because there will be more supply — goods, services — to go around. And it could help to explain why the economy has been able to expand quickly even as the job market seems to be slowing down.
In fact, Fed officials think that rates are above neutral today, effectively hitting the brakes on the economy, in part because of America’s cooling labor market. The unemployment rate is now at 4.2 percent, which is up from 3.7 percent a year ago. Job openings have come down. Far fewer people have been quitting.
But policymakers still want to avoid cutting rates too much too quickly: They don’t want to end up inadvertently hitting the accelerator. If they were to heat the economy back up, it could reignite inflation.
All of the uncertainty might argue for cutting only slowly, which would give the Fed time to watch how the economy is reacting to each move — allowing officials to carefully assess whether they’re getting close to neutral.
“The time may be approaching to consider slowing the pace of interest rate reductions, or pausing, to carefully assess the current economic environment, incoming information and evolving outlook,” Alberto Musalem, the Federal Reserve Bank of St. Louis president, said this month.
Big unknowns loom ahead.
But all this could be complicated by economic policies coming out of the new Trump White House. Big tariffs or mass deportations could both have the potential to stoke inflation and slow growth. Tax cuts and deregulation might speed growth up.
But exactly what policies President-elect Donald J. Trump will try to pass, how the various policies are put into effect and how companies and other countries might respond are all unknown.
Fed staff members are probably thinking through the various possibilities. In December 2016, central bank officials were briefed on how the tariffs Mr. Trump had promised during his campaign might affect the economy after his election win that year.
But officials are unlikely to signal out loud how they would react to hypotheticals: They will need a clearer sign of what comes next before they publicly react. Given that, America’s economic future, and the path ahead for Fed policy, is up in the air.
“The outlook is tremendously uncertain,” said Julia Coronado, founder of the research firm MacroPolicy Perspectives.
The post What to Watch as the Fed Makes Its Final 2024 Rate Decision appeared first on New York Times.
