Wall Street is betting that the Fed will make one last rate cut in 2024 and will be more cautious about 2025 (Video)

Investors widely expect the Federal Reserve to cut interest rates on Wednesday by a quarter of a percentage point, the third and final cut of 2024.

But the bigger question is whether the central bank is ready to scale back its planned 2025 cuts — and how Chairman Jerome Powell will answer questions about the Fed’s path during his Wednesday afternoon news conference.

“Fed Chairman Powell will face the delicate exercise of having to reconcile a 25 basis point rate cut with stronger economic and inflation projections and a more gradual policy easing path,” Greg said Daco, EY chief economist.

All eyes will be on the so-called dot plot, a quarterly updated chart that shows each Fed official’s predictions about the direction of the federal funds rate.

In September, as the central bank launched its first rate cut in more than four years, the dot plot revealed consensus among Fed officials in favor of two additional cuts in 2024 and four additional small cuts in 2025 .

Now, projections for 2025 are being called into question following a series of stubborn inflation numbers and cautious comments from Fed officials. Many Fed watchers expect policymakers to revise their estimates for next year.

“We think the main message from the December meeting will be that the FOMC expects it will likely slow the pace of rate cuts going forward,” Jan Hatzius, chief economist at Goldman Sachs, said in a note.

Hatzius revised his 2025 forecast to eliminate a cut in January, but he continues to expect cuts in March, June and September next year, ending with a slightly higher neutral rate of 3, 5 to 3.75%.

That earlier forecast of four rate cuts next year “needs to be rethought,” former Cleveland Fed President Loretta Mester told Yahoo Finance.

Two or three reductions in 2025 “seem fair to me”.

Some Fed watchers disagree, saying Fed officials will stick to their estimates of four cuts in 2025.

“Overall, they still expect inflation to fall,” said Luke Tilley, chief economist at the Wilmington Trust, who expects the median estimate for 2025 to remain at four cuts.

“They still think the rates are restrictive.”

Barring a sharp slowdown in the labor market, regaining greater confidence that inflation is falling will likely be the most important factor in determining the timing of the next rate cut, according to Matt Luzetti, chief economist of Deutsche Bank in the United States.

“The Fed can afford to be patient as the economy continues to show strength and downside risks to the labor market have diminished,” Luzetti added. “Available inflation data has exceeded expectations and increased the risk that progress will be slower than expected or even stagnant.”

Minutes from the Fed’s last policy meeting in November revealed that many officials were uncertain about the neutral rate position, referring to the level of the Fed’s benchmark interest rate that neither boosts nor slows growth.

This creates ambiguity about how restrictive interest rates are currently, prompting many officials to support a more gradual reduction in rates in the future.

Fed Chairman Jerome Powell has given the Fed enough room to adopt a slower pace if necessary, saying in early December that “we can afford to be a little more cautious” as the economy is stronger than expected in early fall.

The Fed’s policy decision is expected to be made public at 2 p.m. ET, followed by Powell’s press conference at 2:30 p.m. ET.

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