Fed poised to cut US interest rates again as spotlight moves to 2025 forecast

Markets look towards Federal Reserve's quarterly economic projections as rate cut considered a near certainty

Federal Reserve chairman Jerome Powell. Reuters

The Federal Reserve is expected to cut US interest rates for a third consecutive time, but uncertainty over the path ahead will put the spotlight on the central bank's latest economic forecast.

Traders widely expect the Fed will lower interest rates by 25 basis points, according to the CME FedWatch tool. Doing so would lower the effective federal funds rate to 4.25 to 4.50 per cent, a full percentage point lower than when the Fed began easing in September.

The Central Bank of the UAE will follow the US central bank's decision due to the currency peg.

With a rate cut considered to be a near certainty by traders, they will place greater scrutiny on the Fed's quarterly “dot plot”, which projects how many rate cuts it will issue next year.

In September, the Fed anticipated it would issue four quarter-point cuts in 2025 to lower the target range to 3.25 to 3.50 per cent.

During speaking engagement since the Fed's last meeting, chairman Jerome Powell has said the central bank is in no rush to cut interest rates while inflation pressures remain.

Markets now expect the Fed will move at a slower pace. CME Group data showed that traders expect the Fed will lower rates by 50 basis points next year, starting with a pause in January.

“The Fed will likely follow through so as not to thwart expectations but the odds it will take a pause in January have increased,” Bob Schwartz, senior economist at Oxford Economics, wrote in a note to clients.

The Fed will release its quarterly economic projections alongside its rate decision at 2pm ET. Mr Powell is due to address to reporters at 2.30pm.

Driving much of the uncertainty on the Fed's path of interest rate cuts is a series of stronger-than-expected economic data. Fed officials have indicated in recent weeks that progress in taming inflation has stalled.

The Fed's preferred inflation metric has been moving sideways in recent months. The Personal Consumption Expenditures Price Index rose by 2.3 per cent on an annual basis last month, up from 2.1 per cent the month before. Core PCE, which strips out food and energy prices, also rose from 2.7 per cent to 2.8 per cent year on year.

This month, Fed governor Christopher Waller acknowledged that inflation “may be getting stuck above” the central bank's long-term 2 per cent target, although he was still leaning towards a rate cut.

Job growth also bounced back in November with 227,000 gains, after a Boeing strike and extreme weather weighed on the previous month. Meanwhile, the unemployment rate edged up slightly from 4.1 to 4.2 per cent.

Further complicating the Fed's next steps is the incoming presidency of Donald Trump, who will be sworn in on January 20. Economists generally agree that his policies of mass deportation and universal tariffs are inflationary.

Mr Powell said the Fed does not take fiscal policy or politics into account, and that it is too soon to say how Mr Trump's policies will affect the economy.