US Fed expected to cut again, despite uncertain path ahead

The Fed has made significant progress tackling inflation through interest rate hikes in the last two years, and recently began paring rates back in a bid to boost demand in the economy and support the labor market. In the last couple of months, the Fed's favored inflation has ticked higher, moving away from the bank's long-term target of two percent, and raising concern that the battle against inflation is not over.

Nevertheless, the financial markets still overwhelmingly expect the Fed to announce a quarter percentage-point cut on Wednesday, lowering its benchmark lending rate to between 4.25 and 4.50 percent, according to CME Group data.

"If the Fed wasn't going to do that, they would have dissuaded markets of that notion a long time ago," Moody's Analytics chief economist Mark Zandi told AFP on Tuesday.

A cut on Wednesday would be the Fed's third in a row and would leave rates a full percentage point below where they were just three months ago. "I'm dubious that another cut is necessary," Citigroup global chief economist Nathan Sheets told AFP. But a rate cut on Wednesday is "very much baked in" at this point, he said.

This is the final planned interest rate decision before Democratic President Joe Biden makes way for Republican Donald Trump, whose economic proposals include tariff hikes, and the mass deportation of millions of undocumented workers. These proposals, combined with the recent uptick in inflation data, have led some analysts to pare back the number of rate cuts they expect in 2025, predicting that interest rates will need to remain higher for longer.