Fed faces important choice post this cut
Markets are pricing in a more than 90% probability of a 0.25-percentage-point cut in the Fed funds rate this week. Officials are likely to pencil in higher «dot plots» for rates, notwithstanding the dispersion in forecasts among them, together with a move up in the terminal rate closer to what the market expects. Finally, while Chair Jerome Powell will not close off his options for January completely, he is expected to signal at his press conference that the central bank will stand pat when the Federal Open Market Committee meets next month.
What comes after January is the subject of an interesting debate. Many anticipate the «skip» will be followed by a resumption in easing, with cuts continuing on a quarterly basis throughout 2025. Some think of it more as a «pause,» assigning greater uncertainty to rate reductions thereafter. Very few, at least for now, think that Wednesday's reduction may mark the end of the current cutting cycle.
Varied assessments about inflation, the economy and the policy intentions of the incoming administration explain this range of opinions. The fact that the path of Fed easing in 2024 has ended up diverging by some 75 basis points from the consensus in markets of a year ago is also playing a role.
Last week's inflation data confirmed the now more hesitant nature of the journey back to the Fed's 2% target, something that a few of us have noted for a while. Consumer prices, excluding volatile food and energy costs, rose 0.3% for a fourth straight month, the report released last
