“The decision is not a no-brainer,” said former Dallas Fed President Robert Kaplan.
Kaplan said that, in the end, the Fed believes that the level of rates after the cut is still putting some downward pressure on demand, thus limiting inflation, while reducing the risk that rates will cause a recession.
Most Fed officials still believe the funds rate is well above a neutral level which would not be putting any downward or upward pressure on demand, ” but there’s widespread recognition that estimates of neutral are very uncertain,” said former Fed Gov. Larry Meyer in a note to clients.
That makes the decision a close call, he added.
Fed officials will meet next Tuesday and Wednesday and release a policy statement at 2 p.m. at the end of their meeting. Powell will follow with a press conference at 2:30 p.m..
Fed-fund futures indicate traders overwhelmingly expect the Fed to cut. There has been no signal from the Fed that the decision is a closer call than traders expect.
”They are not going to disappoint the markets next week,” said Eugenio Aleman, chief economist at Raymond James.
Stephen Stanley, chief U.S. economist at Santander, said the market has taken its signal from Powell’s recent remarks.
“Powell seems awfully relaxed about inflation,” he said.
At the meeting, the Fed will release its latest forecast for the economy and monetary policy. Economists will be watching closely to how many cuts are penciled in for 2025.
In September, Fed officials penciled in four quarter-point cuts in 2025, or one cut per quarter.
Aleman thinks the Fed will signal few cuts.
“I think they are going to go down to, at most, two rate cuts next year,” he said.
At present, fed-funds futures indicate traders expect only two cuts next year.
Guha said the Fed will show a median of three cuts next year. He said this is “superficially dovish.”
In 2025, the Fed will face a “wall of worry” as they see the first fiscal policy moves from the Trump administration, said Carl Weinberg, chief economist at High Frequency Economics.
For instance, if the president is going to impose 30% import tariffs on Canada and Mexico that he has touted, “I think the bets are off for any rate cuts next year,” Weinberg said.
In addition to across-the-board tariffs, Trump campaigned on cracking down on illegal immigration through deportations and passing tax cuts. On the surface, these policies seem likely to boost inflation.
But economists don’t think the Fed’s new economic forecast will incorporate its view on Trump’s proposals.
“There are definitely important shifts that are taking place. But Powell has said that the Fed won’t assume anything ahead of time about Trump’s plans.
The Fed would like to forecast and get ahead of things but can’t do that with government policy.
“Washington is unpredictable, right,” he said.
“There are so many different pieces of information that are pointing in different directions. It is not easy to make a policy decision with so much uncertainty,” Aleman agreed.
The Fed is aware of all these risks and they are going to be very very careful with their guidance going forward,” he added.
Powell has already signaled that the Fed will cut its benchmark rates cautiously.
This could raise criticism of the Fed in the months to come, said Diane Swonk, chief economist at KPMG.
“He has already suffered the most public criticism of any Fed chair on record, it does not phase him,” she said.
