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What you need to know
- The Federal Reserve's Open Markets Committee kicked off its two-day meeting Tuesday.
- The Fed is widely expected to cut the key federal funds rate by a quarter percentage point this week, but it's unclear what the committee could project for 2025 in its Summary of Economic Projections, which will be released Wednesday alongside the statement on the rate decision.
- Economists will be paying attention to Fed Chair Jerome Powell's message when he addresses reporters at the close of the meeting on Wednesday.
The Federal Reserve's policy committee kicked off its two-day meeting on Tuesday, and the outcome of the gathering could have implications well into the new year.
Federal Reserve Open Markets Committee will meet for the final time in this year on Wednesday and announce their policy decisions. Committee members are widely expected to reduce the federal funds rate (which is a key indicator of inflation) by a quarter-point and may discuss other technical policy changes.
The fed funds rate was cut for the first four-year period at the September meeting. It was then reduced again the following month. If the rate is cut as predicted this week, it would be a full percentage point lower than last year.
Despite the Fed's immediate moves being fairly predictable, the changing economic landscape presents some questions for central bankers as they move into the new year. Here's what you need to know.
How has the economy changed since November?
Since the last meeting of the Committee in November, the economic climate has altered. The committee was surprised that unemployment has not increased as much central bankers had expected, and inflation has not decreased as much the committee hoped.
The FOMC can use interest rates to boost or slow down the economy. The committee raises rates when the economy becomes too hot, causing inflation. This is done to discourage spending and borrowing. The committee tries to prevent layoffs when the economy is slowing down by lowering interest rates and encouraging consumers to spend.
This cycle of interest rate reductions was prompted by concerns about rising unemployment. The Federal Reserve may be out of excuses to reduce its interest rate, given the strong job market and continued consumer spending.
What is still the reason for Fed’s likely to cut its key rate?
Some wonder why the Federal Reserve cut the key interest rate by a quarter-point this week, given the economic shifts that have occurred this month. CNBC’s survey, released on Tuesday, showed that 93% of respondents believe the Fed will reduce by a quarter point at its meeting this week. However only 63% think it is the right decision.
Some economists say central banks are more likely to follow through with a highly anticipated move, because traders have come to expect it.
“The Fed will likely follow through so as not to thwart expectations but the odds it will take a pause in January have increased,” wrote Bob Schwartz, Senior Economist at Oxford Economics.
What Does This Week's Meeting Mean for Policy in the New Year?
Fed Watchers will be able to learn what the recent economic statistics mean for central bank policy when they release their Summary of Economic Projections Wednesday along with its decision.
These projections represent the best estimates of each committee member on future unemployment, inflation, and interest rate reductions. The average economist expects three rate reductions in 2025. This is less than they expected in their last publication in September.
When Jerome Powell, the Chair of the Board, addresses the media after the publication of the decision it will be a good time to listen out for any clues.
"Chair Powell's press conference will likely send a consistent signal that the Fed is set to slow the pace of rate cuts in 2025," wrote Deutsche Bank economists last week.
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