This week, the Federal Reserve (Fed) is gearing up for an important meeting to discuss matters concerning borrowing costsThere is a general consensus in the market indicating an expected rate cut, though the reduction might be less significant than originally anticipatedFurthermore, the Fed may provide hints suggesting a slower pace of rate reductions in the following yearThe resilience exhibited by the American economy has surpassed the predictions made by officials a few months backInflation has been declining at a slower rate than hoped, and the labor market has not weakened as expectedThese shifts in economic expectations could compel the Fed to revisit its phrasing in the upcoming policy statement on Wednesday, along with adjusting projections about the borrowing cost path.

A remarkable buzz among economists is swirling around the legality and need for a neutral interest rate adjustment, which could serve as a justification for the Fed's cautious approach towards rate cuts

Tim Duy, Chief U.SEconomist at SGH Macro Advisors, articulates that the current uncertainty may actually afford policymakers the opportunity to take a more gradualist approach towards rate reductionsHe emphasized the importance of being prudent as the Fed navigates closer to estimations of the upper limits of current rates.

Generally, the market is betting that the Fed will enact a 25 basis point reduction, bringing the targeted federal funds rate to a range of 4.25% to 4.5%. However, this projected rate is conspicuously higher than the September forecast of 2.9% for the neutral rate, showing a trend among policymakers to potentially revise these estimations upwardsThis inclination among certain decision-makers might also contribute to a reduction in the expected magnitude of rate cuts.

Several key indicators over the past few months have suggested that the economy is performing better than analysts had predicted during the last projection release

• Rising Investment Sentiment in Memory Chips
• Impact of Early Rate Cuts by the ECB
• China's Storage, Photonics Tech Sees Major Advance
• Federal Reserve Cuts Rates by 25 Basis Points!
• Silicon Carbide Prices Plummet by Nearly 30%

Policymakers are likely to elevate their economic outlook forecasts, which may reflect heightened inflation rates, declining unemployment rates, and stronger economic growth.

The latest "dot plot," a chart illustrating the anticipated federal funds rate trajectory, is expected to reveal a diminished number of rate cuts in 2024 compared to September's forecastsHowever, the full extent of these predictions might not encapsulate the nuances of the unfolding policy impacts, as Fed officials are keen on awaiting more granular information on governmental tariff and deportation policies to accurately incorporate these dynamics into projections on economic growth and inflation.

A recent survey by Bloomberg indicates that a majority of economists are anticipating three rate cuts in the upcoming year, a decrease from what policymakers projected in SeptemberAnna Wong, Bloomberg’s Chief U.S

Economist, noted the anticipated softness in core Personal Consumption Expenditures (PCE) inflation data for November, even though it won’t formally be released until December 20thShe implied that the Fed may be willing to entertain the possibility of further rate cuts.

Regarding the content of the Fed's statement, officials might retain a similar message to that of November, indicating that the risks tied to employment and inflation objectives remain "roughly balanced." Yet, it's possible they may incorporate some language suggesting expectations of "gradually" lowering rates or hinting that a pause in rate reductions may be imminentEconomists at Barclays suggest that following the anticipated cut this week, the Fed could maintain rates in January by subtly conveying such an intention through relevant wording.

Fed Chair Jerome Powell is expected to expound upon how officials have interpreted economic data and its implications for policy during the ensuing press conference

He is likely to face inquiries regarding when a pause in rate cuts could manifest, along with questions about whether that pause may occur as early as January.

Investors are poised for any insights officials may share regarding future policy directionsFurthermore, Powell might find himself fielding questions about whether the central bank's progress toward achieving its inflation target is stalling, as well as about the current optimistic view of employment prospects.

As the focus shifts toward anticipated actions in 2025, many investors eagerly await the Fed's decisionsTheir anticipation centers not only on the upcoming cut but also on potential revisions to the Fed's predicted actions for 2025. All eyes will be fixed on the Fed's dot plot, which is updated quarterly to showcase individual officials’ predictions regarding the future of federal funds ratesThe unpredictable inflation data series and cautious remarks from Fed officials place the forecast for 2025's policies under scrutiny as new government policies could further complicate decision-making for central bank leaders.

The Fed's first rate cut in more than four years occurred in September, alongside a dot plot indicating consensus among officials for two additional cuts in 2024 and four further, albeit minor, cuts in 2025. However, the prevailing economic landscape has changed significantly since then.

Former Cleveland Fed President Loretta Mester contends that previous predictions of four rate cuts in the upcoming year need re-evaluation, projecting a "slowdown" in the 2025 economy

In her opinion, two to three cuts in 2025 would be reasonable.

Conversely, Wilmington Trust Chief Economist Luke Tilly holds a divergent view, asserting that Fed officials will likely maintain their prediction of four reductions in 2025, primarily due to an expected decrease in overall inflation.

In early December, Fed Chair Jerome Powell indicated an open-minded approach to possible policy adjustments in response to the stronger-than-expected economic performance in early autumnHowever, a couple of unexpected developments in late 2024 have left some economists surprised and have the potential to temper expectations.

One key area of concern is the job market, which has not shown signs of significant weaknessAdditionally, the persistent stubbornness of fall inflation data means it has not made progress towards the Fed's target of 2%.

Recent evidence includes November's inflation data released by the U.S

Bureau of Labor Statistics, indicating a year-on-year rise in the Consumer Price Index (CPI) of 2.7%, slightly above October's 2.6%. Furthermore, the core CPI—excluding food and energy price fluctuations—has climbed 3.3% year-on-year for the fourth consecutive month in NovemberAdditionally, a surprising uptick in wholesale prices exceeding market expectations has compounded inflationary pressures, which have heightened market speculation regarding the likelihood of a rate cut this week to over 95%.

A divergence of viewpoints among officials remains, with core inflation and employment being the central points of contention concerning the Fed's potential adjustments to their economic predictions for 2025. Tilly represents a more cautious approach, suggesting that the midpoint forecast range for interest rates by the end of 2025 will hover around 3.25%-3.5% following the dot plot's release.

He underscored that while the recent inflation figures remain elevated, it’s crucial for Fed officials to closely observe labor market dynamics

Despite market fluctuations, the overarching trend indicates a cooling downOverall, he perceives a 35% chance of recession given the weakness in the labor marketTilly highlighted a downward trajectory in labor demand, as private sector job growth has recently dipped below the average of the last six months, registering only 108,000 jobs.

In contrast, Wilmington Trust bond portfolio manager Wilmer Stith holds a more optimistic perspective, confident that the Fed can still make four interest rate reductions next year.

Stith predicts that during Wednesday's meeting, Powell will convey that the Fed is making headway in controlling inflation, drawing attention to the positive trends seen in housing prices and other CPI componentsHe remarked, "This is undoubtedly a positive sign that suggests we’re getting closer to our target."

As for the meeting's immediate outcome this Wednesday, Stith asserted, "A 25 basis point cut seems almost inevitable."

Furthermore, several Fed officials have expressed optimism regarding inflation outlooks

Tom Barkin from the Richmond Fed, in mid-November, forecasted a continued decline in inflation for the following year.

Barkin attributed the stabilization of recent core inflation numbers to more stringent year-on-year comparisonsHe posited that due to heightened inflation indicators in Q1 of this year, forecasts for the initial quarter of 2025 may be even more favorable, compelling officials to reassess the inflationary landscape.

Similarly, Austan Goolsbee of the Chicago Fed, during an early December speech, urged a broader perspectiveHe recalled how inflation spiked to 9% in 2022, marking a record high since 1981 before later decreasing significantlyGoolsbee added, "I remain convinced that we will achieve our goal of 2% inflation."

Conversely, Mester's take diverged as she emphasized that the recent data, inclusive of the CPI released last week, is sufficient for Fed officials to rethink their policy direction toward 2025.

Mester remarked, "I think there’s a need for a re-evaluation of the appropriate policy stance for next year, especially as we contemplate still-uncertain fiscal policy actions that we know will emerge sooner or later."

She articulated that while a rate cut remains plausible this week due to prevailing market expectations, a pause in January seems more likely