The Fed Faces an Important Choice After This Rate Cut

There is widespread agreement in markets and among economists that the Federal Reserve will cut interest rates at its policy meeting on Wednesday. There is also agreement that this will be accompanied by forward guidance suggesting fewer cuts in 2025 than previously indicated, a higher terminal rate and a pause in January. Beyond this, much will depend on the evolution of Fed thinking about an inflation rate that is proving to be sticky above its 2% target.

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.