The U.S. Federal Reserve is widely expected to lower interest rates by 25-basis points at the conclusion of its latest policy meeting today (Dec. 18).
Futures markets have priced in a 93% chance that the U.S. central bank lowers rates a quarter of a percentage point at its final meeting of the year.
However, it is becoming less clear what the Federal Reserve will do going forward. There’s a growing consensus that the central bank will pause interest rate cuts at its meeting in January.
Many traders are also expecting the Federal Reserve to pause at its March meeting. In fact, futures markets are pricing in only two 25-basis point rate cuts for all of 2025.
The current outlook is based on the fact that inflation in the U.S. remains stubborn and above the Fed’s 2% annualized target.
Additionally, the U.S. economy remains strong, growing at a 3% annual pace and the American labour market is holding strong.
There are also growing concerns that the policies of president-elect Donald Trump will spark a rise in inflation going forward. Those policies include trade tariffs and tax cuts.
If markets are accurate and the U.S. central bank lowers interest rates by 25-basis points as expected, the trendsetting Fed Funds Rate will decline to a target range of 4.25% to 4.50%.
So far, the Federal Reserve has lowered interest rates by 75-basis points since September of this year.
While the annual inflation rate in the U.S. has come down from its 40-year peak of 9.1% in June 2022, it has been stuck between 2.5% and 3% for most of 2024.