Fed Rate Cut Expected with Powell’s Tone on Inflation in Focus

The Federal Reserve is widely expected to announce a 25 basis points (bps) rate cut today, which would lower the federal funds rate to a range of 4.50% to 4.75%. This decision comes as market participants are increasingly focused on comments from Fed Chair Jerome Powell regarding inflation and potential new fiscal policies under the Trump administration.

Powell's comments on inflation will be under close scrutiny, particularly as he is expected to navigate discussion around the implications of Donald Trump's recent election win. Market analysts will be keen to detect whether the Fed is adopting a more cautious approach towards inflation in light of possible increases in government spending associated with Trump’s policy agenda. Any signals indicating that the Fed might take a more defensive approach to rising prices could have profound implications for future interest rate decisions, particularly looking ahead to 2025.

Current trading in fed funds futures suggests about a 67% probability that another 25 bps cut could follow in December; this figure has slightly decreased from over 70% prior to the election. Looking further down the line, it seems the Fed might adopt a more conservative stance in 2025, opting for only two more cuts to reach a target range of 3.75% to 4.00% by mid-year. After this, the Fed is likely to pause for a thorough assessment of the economic landscape.

One important factor to monitor is the behavior of the 10-year Treasury yield. This yield has experienced a significant rally since September and recently tested a key technical level. Specifically, it gapped up yesterday, pressing against a critical retracement level of 61.8% from 4.997 to 3.603, currently at 4.464. A sustained breakout above this level would strengthen the view that the correction from 4.997 has completed and could lead to further gains in the yield, eventually retesting the 4.997 high.

Fed, Interest, Inflation