Fed Will Likely Cut Rates This Week but No One Knows What Happens Next

The market is all but certain Federal Reserve officials will cut interest rates at the end of their two-day meeting this week. But what comes next is anyone’s guess.

The CME Group’s FedWatch tool currently assigns a 94 percent chance of a quarter-point cut on Wednesday. That would bring the Fed’s overnight interest rate target down to a range of 1.50 and 1.75 percent.

But the odds of further cuts have been declining as fears of a recession have waned and the economy has shown more resilience than many gave it credit for this summer. The odds of the Fed holding steady at 1.50 to 1.75 percent are better than even all the way out through March now.

Many Fed officials believe that once the October cut is in place, the Fed will have done enough to innoculate the economy against a sharp downturn. And while there are some on the Fed who think it should continue to cut, they appear to be out-numbered by those who would rather take a wait and see approach.

That could be more difficult, however, if the economy slows down by more than expected. On Wednesday morning, while Fed officials are meeting to discuss the economy and monetary policy, the Commerce Department will release its first official estimate of third-quarter gross domestic product. It is expected that the economy grew at an annualized rate of 1.7 percent, down from the 2 percent rate in the second quarter but in-line with the Fed’s vision for the American economy’s potential.

But if growth slows down by more than that, Fed chief Jerome Powell could find that he needs to signal that the central bank has not necessarily called time-out on rate cuts. Alternatively, if the economy grew faster than expected, it is almost certain that rate cuts will be off the table for the remainder of the year, at least.

President Donald Trump and his closest economic advisers believe the economy can–and should–grow much fast than the Fed’s long-term forecast. That means that a 1.7 percent growth rate looks healthy to the Fed but ailing to the Trump administration. So do not expect the president to lay off the Fed this week.