US Federal Reserve Poised for Key Rate Cut as Biden Era Ends

As the presidency of Joe Biden approaches its conclusion, the U.S. Federal Reserve is expected to announce a significant quarter-point cut to its key lending rate during its final meeting before the transition of power. Despite recent inflationary pressures, analysts predict that the Fed will prioritize support for the labor market and economic stability as it prepares for a change in leadership.

The upcoming meeting, taking place on Tuesday and Wednesday, marks the last decision regarding interest rates before President-elect Donald Trump takes office on January 20, setting the stage for potential shifts in monetary policy direction. The anticipated cut would lower the Fed’s key lending rate to between 4.25% and 4.50%, reflecting a full percentage point reduction since the bank began cutting rates earlier this year.

Transitioning Leadership and Economic Uncertainty

The Fed’s current chair, Jerome Powell, has stated that he intends to serve out his term, which extends until 2026. However, the changing political landscape brings uncertainty, especially with Trump’s recent victory over Vice President Kamala Harris in the November elections. “The Fed is expected to be more gradual in its easing of monetary policy in view of the policies that will be put in place by the Trump administration,” said Gregory Daco, chief economist at EY, emphasizing a cautious approach in response to new economic policies.

Trump’s administration has expressed a commitment to addressing rising living costs, a primary concern among voters. However, some experts have raised alarms over several of his proposed initiatives, including plans for sweeping tariffs on imported goods and deportation of undocumented workers. Diane Swonk, chief economist at KPMG, cautioned that such actions could simultaneously fuel inflation while hindering growth. Nevertheless, she remains confident that the Fed will proceed with a rate cut during this week’s meeting.

Recent Trends: Inflation and Growth

Since September, the Federal Reserve has implemented a total of 0.75 percentage points in rate reductions, shifting its focus from achieving a long-term inflation target of 2% to better supporting the labor market amid evolving economic conditions. While inflation has fluctuated recently, it remains close to the Fed’s target level, allowing officials to pursue cuts in light of robust economic growth.

Despite a slight weakening in the labor market, the overall economic landscape appears resilient. Futures markets indicate an overwhelming probability—greater than 95%—that the Fed will enact a quarter-point cut this week, according to CME Group data. However, projections for the following year show increased uncertainty, with financial markets estimating less than a 65% chance that rates will fall by three-quarters of a percentage point by the end of 2025. This suggests the potential for two additional quarter-point cuts next year, following the expected announcement.

Future Rate Path and Economic Projections

Alongside the anticipated rate decision, the Federal Reserve is scheduled to release updated economic forecasts, which will outline expectations for future rate cuts. In September, members of the Fed’s rate-setting Federal Open Market Committee (FOMC) predicted an average of four more quarter-point cuts throughout 2025, projecting that the benchmark lending rate could decrease to between 3.25% and 3.5%.

Recent upticks in inflation, however, have prompted some analysts to adjust their expectations for the pace of future cuts. Barclays economists suggest that while a quarter-point cut is likely this week, the Fed may indicate a more cautious approach moving forward. They forecast only two rate cuts in 2025.

In contrast, Goldman Sachs economists are more optimistic, predicting consecutive 25 basis point cuts in December, January, and March, followed by quarterly reductions in June and September. Yet, they caution that comments from Fed officials hint at the possibility of slowing the pace of cuts sooner, potentially starting with the January meeting.

This evolving situation underscores the complexities facing the Fed as it balances inflation control, labor market support, and the anticipated economic policies of the incoming Trump administration. The path forward is fraught with challenges, and how the central bank navigates these dynamics will be critical in shaping the U.S. economy’s future trajectory.