The US economy has proved more resilient than what officials expected just a few months ago. Recent data shows inflation is coming down more slowly than officials anticipated, and the labor market is not weakening as much as feared. 

That revised outlook could prompt officials to tweak the language in their post-meeting policy statement on Wednesday and raise the projected path of borrowing costs. 

Stronger-than-expected data has also raised questions about whether the neutral rate, a point at which the Fed is neither boosting nor slowing the economy, is now higher. That uncertainty could give officials more reason to move slowly with rate cuts, said Tim Duy, chief US economist for SGH Macro Advisors. 

“As you get closer to the upper bound of those estimates, it makes sense from the Fed’s perspective to move more slowly as it assesses where it is in the policy cycle,” he said. 

The Fed’s rate decision, along with officials’ updated quarterly economic forecasts, will be released at 2 p.m. in Washington on Wednesday. Fed Chair Jerome Powell will hold a post-meeting press conference 30 minutes later. 

Rate Decision

The US central bank is widely expected to lower its benchmark rate by a quarter percentage point this week, according to futures contracts. Such a move would bring the federal funds rate to a target range of 4.25% to 4.5%, a full percentage point below where it was in September when officials started cutting rates. 

That would leave the benchmark rate well above the 2.9% median estimate officials wrote down in September for where they expect rates will settle in the long run. Recent commentary suggests policymakers’ estimates of that rate — which is seen as a proxy for the neutral rate — will continue to climb higher in the new projections. 

That’s part of the reason why some policymakers prefer to err on the side of fewer rate cuts. 

Projections

Economic data released in recent months has shown an economy that is holding up better than what officials expected when they last released projections in September. This means policymakers may upgrade their outlooks to show higher inflation, lower unemployment and stronger economic growth in their updated forecasts for 2024.  

The most scrutinized portion of the updated estimates will be the central bank’s “dot plot,” which displays the expected rate path. Officials are expected to pencil in three interest-rate cuts for next year, according to the majority of economists surveyed by Bloomberg News, one fewer than policymakers forecast in September. 

What Bloomberg Economics Says…

“A soft reading on November core PCE inflation – due out Dec. 20, but which Fed staff can already estimate with high accuracy from the CPI and PPI data – likely has convinced even the minority of Fed officials who see upside risks to inflation to reluctantly go along with another rate cut.”

— Anna Wong, chief US economist

The projections are not likely to fully reflect President-elect Donald Trump’s proposed policies, however. Several Fed officials have said they are waiting for more specifics on Trump’s plans for tariffs and deportations before incorporating those policies into their forecasts for growth and inflation. 

Statement

Fed officials may opt to leave their statement similar to the language used in November, which said the risks to achieving the Fed’s goals for employment and inflation are “roughly in balance.”

But policymakers could also add language saying that they expect to lower interest rates “gradually,” according to economists at Barclays. 

Another option is to update the statement to suggest an openness to pausing rate cuts in the near future, according to Duy. He expects the Fed will hold rates steady in January after cutting this week and said officials could send that message by introducing wording about the timing of further rate adjustments.

Press Conference

Powell could use his press conference after the meeting to elaborate on how officials are interpreting the economic data and what it could mean for policy. He is likely to be pushed on what it would take for officials to pause rate reductions and whether such a pause could come as soon as January. Investors will be listening for any insight on how officials will be setting their pace going forward.

The Fed chair may also face questions about whether progress toward the central bank’s 2% inflation goal has stalled, and if officials are more optimistic about the jobs landscape now than they were in September.