Federal Reserve Poised for “Hawkish Cut” Amidst Economic Uncertainty

Economists will closely analyze Fed Chair Jerome Powell's remarks during his post-meeting press conference, alongside policymakers' revised projections, for hints of a shift in strategy

The Federal Reserve is expected to reduce borrowing costs on Wednesday, delivering a "hawkish cut" that could set the tone for a slower pace of rate reductions moving forward. Policymakers will pair the anticipated quarter-percentage-point rate cut with updated economic forecasts, shedding light on their outlook for the first months of President-elect Donald Trump's administration. The expected move would lower the central bank's benchmark policy rate to the 4.25%-4.50% range, a full percentage point below September levels, when the Fed began easing monetary policy to counter inflation. However, with inflation still above the 2% target and the economy outperforming expectations, the trajectory for further cuts in 2024 remains uncertain.

Adding to the complexity is the potential impact of Trump’s incoming policies on tariffs, taxes, and immigration, which could reshape the economic landscape. Fed officials' previous projections, issued in September, indicated plans to lower the benchmark rate to around 3.4% by the end of 2025. However, recent developments, including stalled progress on inflation and Trump's surprise election win, have prompted some analysts to scale back expectations. Investors now anticipate a more cautious approach, with only a half-percentage-point reduction likely in 2024. Economists will closely analyze Fed Chair Jerome Powell's remarks during his post-meeting press conference, alongside policymakers' revised projections, for hints of a shift in strategy. Diane Swonk, chief economist at KPMG, characterized the anticipated cut as "hawkish," citing mixed economic signals.

The Fed's approach could be influenced further by the administration transition. Trump’s inauguration on Jan. 20 will be followed by a Fed meeting on Jan. 28-29, where policymakers may opt to hold rates steady to assess the economic trajectory. A Reuters poll of economists revealed that 58 out of 99 respondents expect the Fed to pause rate cuts at the January meeting, reflecting a growing consensus for caution amid heightened uncertainty.