At 3 a.m. Beijing time on Thursday, the Federal Reserve will announce its latest interest rate decision, with markets widely expecting another reduction in borrowing costs. This would mark the third consecutive rate cut. If expectations are met, the benchmark rate will be lowered by 25 basis points, adjusting the target range from 4.5%-4.75% to 4.25%-4.5%. Although this cut will bring the federal funds rate down by a full percentage point compared to September, recent economic data indicates that the U.S. economy is more resilient than Federal Reserve officials previously anticipated, which could affect future monetary policy adjustments.
Robust Economic Data Could Influence Future Rate Cuts
Although the Federal Reserve continues to cut rates to tackle inflation and economic slowdown pressures, recent U.S. economic data has been unexpectedly strong. The latest figures show that inflation is declining slower than predicted by the Fed, and there are no signs of expected labor market weakness. Such data might lead Federal Reserve officials to adjust their expectations regarding the neutral rate (the rate that neither stimulates nor restrains economic growth), prompting a more cautious approach to future rate cuts.
Some analysts suggest that due to the resilient economic conditions, the Federal Reserve may alter part of its language in the upcoming policy statement, especially concerning the anticipated rate cuts and future rate paths. Chief U.S. economist Tim Duy notes that as the economy approaches the upper limits of these neutral rate estimates, the Fed might adopt a slower pace in policy adjustments. This cautious outlook is largely due to increased uncertainties, particularly concerning U.S. economic growth potential and inflation trends.
Economic Outlook May Be Revised Upward
With recent U.S. economic data indicating stronger growth, many economists and analysts expect that the Federal Reserve will revise its future economic forecasts upward. Latest economic indicators show unemployment rates continuing to decrease and inflation gradually receding, suggesting that the economy may have moved past the earlier shadows of recession. Therefore, it is possible that the Federal Reserve will adjust its rate projections, especially in the "dot plot" section, reflecting improvements in economic growth, unemployment, and inflation.
Most economists anticipate that the Federal Reserve will cut rates three times next year, even though it's one less than the September forecast. Based on the latest market expectations, the Fed might adopt a more moderate pace of rate cuts in 2024, partly because of the economy's stronger-than-expected resilience and the slower pace of inflation reduction.
Trump Administration Policies Still Unclear
Despite strong economic data, fiscal policies from the Trump administration remain a focal point for the market. Trump's proposed tariff policies and other economic reforms have not been fully implemented. As a result, the Federal Reserve will consider this uncertainty in predicting future growth and inflation. Several Fed officials have expressed that they wish to see more details from the Trump administration before making further monetary policy adjustments, particularly concerning tariffs and foreign trade decisions.
Powell's Remarks and Market Expectations
Federal Reserve Chairman Powell may use Thursday's press conference to further explain the relationship between economic data and Fed policy, providing the market with more guidance on future rate paths. Investors are particularly attentive to how Powell will address discussions about pausing rate cuts, and whether this pause might begin in early 2024. Many anticipate that Powell may reveal that if economic data remains robust, the Federal Reserve might adjust its monetary stance, potentially refraining from further major rate cuts.
Additionally, Powell might respond to questions concerning how the Federal Reserve perceives the potential impact on the 2% inflation target. As inflation gradually declines, how the Fed balances its inflation target with economic growth will also be a focal point for the market.
Though there may be continued rate cuts at this meeting, the pace of future cuts might be slower than anticipated by the market due to robust economic data and policy uncertainties. Investors will closely follow Federal Reserve Chairman Powell's remarks to assess how the Fed will adjust its policy path and the potential direction of monetary policy in 2024.
