Written by Antonio Di Giacomo, Senior Market Analyst at XS.com
On December 18, 2024, the Federal Reserve of the United States (Fed) will hold its final meeting of the year, and markets expect a 25 basis point interest rate cut to be decided, which would lower the benchmark rate to 4.50%. This adjustment in monetary policy would mark the latest in a series of moves aimed at curbing the inflation that has impacted the U.S. economy. While inflationary data remains concerning, the Fed seems to be weighing other economic indicators, such as the housing sector, showing positive signs that justify a gradual cooling of rates.
Despite persistent inflation, particularly in sectors like food and energy, the Federal Reserve has expressed optimism about certain other economic indicators. The housing market, a vulnerability point in recent years, has shown signs of stability, which could boost consumer confidence and ease financial pressures on families. This may be a key factor in lowering rates, as more accessible and stable housing could enable greater spending capacity and sustained economic growth.
However, expectations for 2025 are far less clear, especially given the political environment anticipated in the United States. With Donald Trump returning to the White House, the course of economic policy and consequently the Federal Reserve’s decisions could shift. Trump’s proposals, which include more protectionist trade policies, fiscal changes, and a stricter approach to immigration, could generate uncertainty about the economy’s future. If these policies significantly alter the economic outlook, the Fed might have to adopt a more cautious stance in its monetary policy decisions.
Trump’s policies could decisively influence the Fed’s decisions. More expansive fiscal policies, such as tax cuts or increased public spending, could lead to higher inflation, prompting the Fed to slow its pace of rate cuts. Additionally, trade tensions or tariffs imposed on other nations could disrupt global supply chains, potentially increasing production costs and consumer prices. This suggests that the Fed must remain flexible and reactive to any unexpected changes in government economic policy.
Furthermore, Trump’s immigration policies could directly impact the labor market and productivity growth. If stricter policies are implemented, a reduction in the influx of immigrant workers could affect key sectors of the U.S. economy, such as construction and technology. This, in turn, could create additional inflationary pressures, forcing the Fed to adjust its monetary policy to address these new challenges.
In conclusion, the Federal Reserve’s final meeting of 2024 promises to be a decisive event for the future of the U.S. economy. While the anticipated rate cut may be prudent to counter inflationary effects and support recovery in key sectors like housing, expectations for 2025 remain uncertain. Donald Trump’s policies, particularly in trade, taxation, and immigration, could significantly reshape the economic landscape and compel the Fed to act cautiously. The Federal Reserve will need to closely monitor these developments and be prepared to adjust its decisions in response to changes in the political and economic environment.