Fed Rate Cuts Are Probably On Pause For The Near Term
The Federal Reserve’s ¼-point rate cut in December looks set to be the last round of easing for the foreseeable future.
TMC Research’s Fed funds model indicates that the current 4.25%-to-4.50% range for the target rate is moderately tight, which suggests there’s room to ease. But there’s uncertainty about expected policy changes favored by the incoming Trump administration – changes that may be inflationary to a degree, according to some forecasters.
At this point it’s impossible to quantify policy risk for the near term. As a result, we anticipate that the central bank will leave rates unchanged at the Jan. 29 FOMC meeting.
The challenge is deciding if Trump 2.0 policy changes will be inflationary or not. There’s room for debate, although that requires making assumptions about what the president-elect will decide, and when, on various fronts, including import tariffs, immigration, and deregulation. A related question: How aggressively will the new administration pursue policy changes? Estimates vary widely, depending on the analyst.
Incoming inflation data is a factor, too. Wednesday’s update on consumer prices for December (Wed., Jan. 15) will be closely read for fresh clues. Economists are expecting a mixed report. The consensus forecast sees headline CPI’s year-over-year change edging higher for a third month to 2.9%. Core CPI, by contrast, is expected to hold steady at 3.3%.
TMC Research expects the Fed will remain in a wait-and-see mode until there’s a higher level of confidence on how the new administration’s policy plans will influence economic conditions.
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