Fed Expected to Cut Rates by 25 Points This Month

The Federal Reserve is widely expected to reduce interest rates by 25 basis points during its meeting on December 18. This anticipated adjustment would bring the federal funds rate down to a range between 4.25% and 4.50%, marking a decisive action amidst persistent inflation figures which remain above the long-term target.

Current inflation metrics reveal that November’s Consumer Price Index (CPI) is expected to reflect an annual increase in headline inflation to 2.7%, up slightly from 2.6% reported in October. Meanwhile, core inflation, which excludes volatile food and energy prices, is projected to hold steady at 3.3% for the fourth consecutive month. These figures suggest ongoing inflationary pressures despite monetary policy efforts to stabilise price increases.

In light of the inflationary context, Federal Reserve Chair Jerome Powell has expressed confidence in pursuing a strategic yet gradual path toward achieving a neutral rate of approximately 2.9%. The aim is to balance the objectives of fostering economic growth while keeping inflation in check. Powell’s guidance allows the Fed to adopt a measured approach to rate adjustments, ensuring that economic benefits are harmonised with inflation control efforts.

The broader economic landscape shows the U.S. economy grew at an annualized rate of 2.8% in the previous quarter. Projections indicate continued but modest growth, with forecasts of 2.1% for 2025 and 2% for 2026. However, economists assign a high likelihood — estimated at 75% — of inflation resurgence in 2025, adding an element of uncertainty to future economic planning and rate-setting strategies.

Market sentiment reflects anticipation of further rate cuts, as approximately 60% of economists foresee at least three additional 25-basis-point cuts by the end of 2025. Despite the December rate cut, the Federal Reserve might choose to pause further reductions in January to reassess economic conditions and inflation patterns.

The rate adjustment decision aligns with a broader strategy to maintain economic stability while addressing the ongoing challenge of inflation.

With these adjustments, the Fed aims to sustain economic momentum while navigating the complexities of inflation management, keeping close watch on evolving economic indicators and conditions.