US Fed expected to cut rates in last meeting of Biden era

WASHINGTON

The U.S. Federal Reserve is widely expected to announce a quarter point cut to its key lending rate on Dec. 18 despite a recent uptick in inflation, in the central bank's last meeting of Joe Biden's presidency.

The Fed is also tipped to signal a slower path of cuts going forward amid uncertainty over the impact of President-elect Donald Trump's economic proposals.

The meeting on tomorrow and Dec. 18 this week is the last Fed rate decision before Biden leaves the White House on Jan. 20, handing the keys back to the Republican Trump for a second term, and analysts expect major policy changes.

"The Fed is expected to be more gradual in its easing of monetary policy in view of the policies that will be put in place by the [Trump] administration," EY chief economist Gregory Daco told AFP, adding he still expects policymakers will vote for a rate cut this week.

While the Fed has a mandate to act independently of Congress as it tackles inflation and unemployment, it still has to consider the effects of the government's fiscal policy on the world's largest economy.

Trump has vowed to tackle the high cost of living, a top concern of voters who sent him back to the White House in November's election, which saw him defeat Vice President Kamala Harris.

But many analysts have voiced concern about some of his key policy initiatives, most notably his threats to implement sweeping tariffs on goods entering the United States and deport millions of undocumented workers.

"Those two together tend to simultaneously stoke inflation and stem growth," KPMG chief economist Diane Swonk told AFP, adding she nevertheless expected the Fed to announce a rate cut this week.

The Fed has cut rates by 0.75 percentage-points since September, pivoting from prioritizing its long-term inflation target of 2 percent toward better supporting the labor market.

The shift in the Fed's posture has been driven by the data: Its favored inflation gauge has fallen sharply in recent years and, despite a recent uptick, remains close to the 2 percent target.

At the same time, U.S. economic growth is still proving to be surprisingly robust. The labor market has weakened slightly, but remains resilient overall.

A quarter-point cut this week would bring the Fed's key lending rate down to between 4.25 and 4.5 percent, a full percentage point lower than it was before policymakers started cutting rates earlier this year.

The futures markets were pricing in a probability of more than 95 percent on Dec. 13 that the Fed would move ahead with a quarter point cut.

But the picture for next year looks a lot less certain, with financial markets penciling in a chance of just under 65 percent that rates will be three quarters of a percentage-point lower at the end of 2025 than they are today.

That would suggest two additional quarter point rate cuts next year on top of the one expected on Dec. 18.

Alongside its rate decision, the Fed will also publish updated economic forecasts, which will include estimates of the number of interest rate cuts policymakers expect over the coming years.