The Federal Reserve is expected to reduce its key interest rate by 0.25% this week, but they may signal caution about making further cuts in 2025.
This move would bring the Fed’s main policy rate down to the 4.25%-4.50% range, which is a full percentage point lower than the 5.25%-5.50% rate in September when they started easing the tight policies put in place to tackle inflation that surged in 2021.
Even though inflation is still above the target and the economy is growing strongly, the Fed may slow down the rate cuts as they face uncertainty with fiscal policies under the new Trump administration.
Federal Reserve is expected to announce a 0.25% rate cut on December 18, with a 97% chance of it happening according to the CME FedWatch tool.
This will be the third consecutive rate cut, but officials are likely to suggest that there will be fewer rate cuts next year than they previously thought. The US economy has been stronger than expected, with inflation dropping slower than anticipated, and the labor market remaining stronger than feared.
Because of this, the Federal Reserve may adjust its future plans for interest rates in their statement after the meeting, possibly showing that borrowing costs will stay higher for a longer period than initially projected.
All eyes will be on Chair Powell’s comments and the updated forecasts to understand the Fed’s plans moving forward.
US Bond Spreads Hit Record Lows, Raising Concerns
S&P Global Ratings has stated that the differences in interest rates between U.S. investment-grade and high-yield bonds have reached record lows, raising fears of a possible bubble. Even though interest rates are high and there is increasing uncertainty, the narrowing of these spreads could hide problems related to the ability of companies to manage their debt in the long term.
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