Monetary Policy in Focus: US Federal Reserve Ahead of Crucial Interest Rate Decision

The financial markets are eagerly anticipating the interest rate meeting of the US Federal Reserve, where a reduction of 25 basis points in the key interest rate is expected. In the appearance of an inflation-friendly future under a renewed Trump presidency, bond investors are already contemplating possible adjustments to monetary easing in 2025. In view of the already persistent inflation, market participants are increasingly opting for shorter-term US government bonds. Long-term bonds face selling pressure as investors demand higher yields for taking on inflation risks. The Fed's expected interest rate target after the two-day meeting is in the range of 4.25% to 4.50%. However, the future course of monetary policy remains unclear. While BNP Paribas expects the Fed to keep rates stable next year, with further cuts not occurring until mid-2026, other institutions forecast two to three rate cuts. George Bory of Allspring Global Investments sees the "hawkish" interest rate decision as a necessary flexibility in view of potential political changes. So far, the American economy presents itself as robust, with a labor market that continuously creates new jobs and a core inflation that remains at a consistently high level of 0.3% in November. This data situation hinders progress toward the Fed's inflation target of 2%. Investors' focus remains on the Fed policymakers' quarterly forecasts, particularly the "dot plots," which reflect the extent of expected easing. In September, when the Fed initiated the rate reduction period, interest rates of 3.4% were forecasted for the year 2025. Since then, the Fed has gradually raised its key interest rate by a cumulative 5.25 percentage points to counteract inflation. A moderate tone in the Fed's future economic outlook seems warranted, says Greg Wilensky of Janus Henderson Investors, referring to Fed Chairman Jerome Powell, who highlighted the stability of the economy despite previous concerns.