Is the Fed's interest rate cut on Thursday morning set in stone? The 2025 rate plan may bring new changes!

Fed officials are set to discuss borrowing costs at this week's meeting, with markets generally expecting another interest rate cut, although the cut may be smaller than previously expected, and hinting at a slower pace of rate cuts next year. The resilience of the U.S. economy has exceeded officials' predictions from a few months ago, with inflation decreasing slowly, and the labor market not as weak as expected. This change in economic outlook may prompt the Fed to adjust its wording in its policy statement on Wednesday and raise expectations for the path of borrowing costs. In addition, stronger-than-expected data has sparked discussions about whether the neutral rate should be raised, which may be a reason for the Fed to slowly reduce interest rates. The Fed's rate decision and latest quarterly economic forecast will be released at 3 a.m. Beijing time on Thursday. Fed Chair Jerome Powell will then hold a press conference half an hour later to explain. Tim Duy, chief U.S. economist at SGH Macro Advisors, believes that the current uncertainty may provide policymakers with more reasons to adopt a gradual rate cut strategy. He pointed out, "As we approach these upper limits, it is reasonable for the Fed to take a more cautious approach in evaluating its policy cycle position." In terms of interest rate decisions, the market widely expects the Fed to cut the benchmark rate by a quarter percentage point, bringing the federal funds rate target range to 4.25%-4.5%. However, this rate level is much higher than the officials' September forecast of a neutral rate level of 2.9%, indicating that policymakers' estimates of this rate are being adjusted. This is also one of the reasons some policymakers lean towards reducing the rate cut size. In terms of economic forecasts, data in recent months has shown better economic performance than officials' expectations at their last forecast release. Therefore, policymakers may raise their economic outlook forecasts, showing higher inflation rates, lower unemployment rates, and stronger economic growth. The latest "dot plot" will show the expected rate path, with officials predicting fewer rate cuts next year than in September. However, these forecasts do not fully reflect the policy impact of President-elect Trump, and Fed officials are waiting for more policy details. Some Fed officials have stated that they need to wait for more detailed information from the Trump administration on tariffs and expulsion policies to incorporate these policy factors into their economic growth and inflation forecasts. According to a survey by Bloomberg News, most economists predict that officials will implement three rate cuts next year, a decrease of one from policymakers' September forecast. Anna Wong, chief U.S. economic analyst at Bloomberg, commented, "Given the softening trend expected in November's core PCE inflation data - even though this data will be officially released on December 20, Fed staff have been able to make highly accurate estimates based on CPI and PPI data - this may have already prompted some Fed officials who were originally concerned about inflation upside risks to change their minds and reluctantly accept the decision to cut rates again." In terms of statements, Fed officials may retain a statement similar to November's, suggesting that risks to achieving employment and inflation goals are "roughly balanced." However, they may also add some wording indicating an expectation to "gradually" lower rates, or hint at a possible pause in rate cuts soon. Economists at Barclays believe that the Fed may keep rates unchanged in January after this week's rate cut and convey this message through introducing related wording. In terms of the press conference, Fed Chair Powell may explain in detail how officials interpret economic data and its impact on policy. He may be asked when rate cuts may pause, and whether this pause will come in January. Investors will closely watch for any insights from officials on the future policy pace. Additionally, Powell may face questions about whether the central bank's progress towards achieving its inflation target has stalled and whether current employment prospects are more positive. Focus on 2025 Action Path Currently, investors generally expect the Fed to make its final rate cut this Wednesday, but the market is more concerned about whether the Fed will adjust its policy action expectations for 2025. All eyes will be on the Fed's "dot plot," a quarterly updated chart showing each Fed official's forecast for the federal funds rate. With a series of unstable inflation data and cautious statements from Fed officials, the 2025 policy forecast is in question. Additionally, new policies from the Trump administration may pose further challenges for central bank decision-makers. In September, the Fed made its first rate cut in over four years. The dot plot at that time showed a consensus among Fed officials that there would be two more rate cuts in 2024 and four additional smaller rate cuts in 2025. However, the current economic situation has changed significantly. Former Cleveland Fed president Loretta Mester stated that the previous forecast of four rate cuts next year needs to be "reconsidered," and predicted that the economy will "slow down" in 2025. She believes that two to three rate cuts in 2025 are reasonable. However, Luke Tilley, Chief Economist at Wilmington Trust, has a different view. He believes that Fed officials will stick to their forecast of four rate cuts in 2025 as overall inflation is expected to decrease. Fed Chair Jerome Powell left flexibility for policy adjustments when necessary in early December, stating "We can be more cautious" as fall economic performance has been stronger than expected. However, some economists are surprised by two unexpected developments at the end of 2024, which may lead to a decline in forecasts. First, there is no new evidence of weakness in the labor market. Second, autumn inflation data stubbornly remain flat, failing to approach the Fed's 2% target. The latest evidence comes from inflation data released by the U.S. Bureau of Labor Statistics last week, showing a 2.7% year-on-year increase in the Consumer Price Index (CPI) in November, slightly higher than October's 2.6%. Meanwhile, the "core" CPI, which excludes food and energy price volatility, rose year on year for the fourth consecutive month in November.3.3%, the unexpected increase in wholesale prices in November exceeded market expectations, further exacerbating inflationary pressures. These data further raised market expectations for the Fed to cut interest rates this week, with the probability rising to over 95%.Figure 3 Official opinions diverge, inflation and employment become the focus Some people are reserved about whether the Federal Reserve will make adjustments to its economic forecast for 2025. One of them is Tilly from Wilmington Trust, who believes that after the release of the dot plot on Wednesday, the range of median rate forecasts for the end of 2025 will remain between 3.25% and 3.5%. Tilly pointed out that while Federal Reserve officials acknowledge that recent inflation data remains high, they also need to closely monitor the dynamics of the labor market. Despite significant market volatility, there is an overall slowdown trend. Compared to most members within the Federal Reserve, Tilly is more concerned about the job market. He believes that due to a weak labor market, the risk of economic recession is as high as 35%. Tilly further emphasized that labor demand is gradually decreasing, and private sector job growth is currently lower than the average level of the past six months, at only 108,000 positions. He predicts that the growth rate of the labor market will further slow down to nearly 100,000 new jobs added per month. As an observer of the Federal Reserve, Wilmer Stiss, the bond portfolio manager of Wilmington Trust, holds a different view. He believes that the Federal Reserve is still likely to implement four rate cuts next year. Stiss expects that at the meeting on Wednesday, Powell will state that the Federal Reserve is making positive progress in controlling inflation, and point out that housing prices and other components of the CPI are moving towards the target. He emphasized, "This is undoubtedly a positive signal that 'we are getting closer to the target'." Regarding the actions of the meeting on Wednesday, Stiss said: "I think a rate cut of 25 basis points is almost certain." In addition, some Federal Reserve officials expressed optimistic expectations about the inflation outlook. Richmond Fed President Tom Barkin predicted in mid-November that inflation will continue to decline next year. Barkin attributed the recent stable performance of core inflation data to more stringent comparisons with last year. He expects that due to high inflation data in the first quarter of this year, the inflation data for the first quarter of 2025 may be more optimistic, a change that once prompted officials to re-examine the inflation situation. Similarly, Chicago Fed President Austan Goolsbee also called for a big picture view in a speech in early December. He pointed out that since the peak of 9% inflation in 2022, this number has significantly decreased, setting a new high since 1981. Goolsbee added, "I still believe we will be able to achieve the 2% inflation target." However, Cleveland Fed President Mester expressed a different opinion in an interview. She believes that the latest data, including the CPI released last week, is enough to prompt Federal Reserve officials to reevaluate the policy path for 2025. Mester said, "I think people need to reconsider the appropriate policy direction for next year, even without considering the uncertain fiscal policy actions in the future, but we know that these actions will happen sooner or later." She further pointed out that while a rate cut this week is still possible because it is expected by the market, it may be paused in January. Mester believes, "They are more likely to complete the rate cut in December and then plan for next year's policy."