By-Yashovardhan Khemka – Senior Manager — Research at Abans Holdings views on USD Fed Interest Rate
In the upcoming US Federal Reserve announcement on December 18th, we anticipate a 25 basis point rate reduction, in line with market expectations. However, the focus will be on the future economic trajectory, which will shape the outlook for interest rate policy. The Federal Reserve meeting is also expected to outline a trajectory for rate cuts through 2025 and potentially into 2026.
We believe the economic forecasts will indicate better growth, accompanied by firmer inflation in the upcoming year. This scenario may limit the Federal Reserve’s ability to reduce interest rates further, given persistent inflationary pressures and signs of a weak labor market. Recent inflation readings and the past two labor market surveys suggest sticky inflation and labor market challenges. Consequently, we expect the “dot plot” projections to be revised, likely reflecting three rate cuts next year instead of the previously anticipated four. The longer-run median interest rate target is expected to remain around 3%–3.25%.
Meanwhile, China’s economic support measures are anticipated to boost investment demand. Additionally, potential policy changes under the upcoming Trump administration are viewed as more balanced rather than being highly inflationary, as often assumed. Although sticky inflation and labor market weaknesses remain concerns, we believe their impact on the markets may be overstated.
Overall, we expect the upcoming FOMC meeting to relieve some of the hawkish pressure built into the market. Investors may see positive movement in risk assets, coupled with a relatively less hawkish tone than widely anticipated. However, the Federal Reserve’s inflation expectations will remain a key monitorable, as they will significantly influence the future rate trajectory.