Here’s What to Watch as the Fed Meets Thursday

Federal Reserve officials are widely expected to cut rates by a quarter point, as uncertainty about a second Trump presidency looms large.

Federal Reserve officials are widely expected to cut interest rates on Thursday. The bigger focus will center on what comes next for America’s central bank.

Fed officials are cutting interest rates in response to months of slowing inflation. Policymakers lowered borrowing costs for the first time in four years in September, reducing them by half a percentage point. Officials projected two more smaller rate cuts in 2024 and a string of further reductions in 2025.

But a combination of stronger recent economic data and President-elect Donald J. Trump’s return to the White House could muddle that outlook.

The job market, which seemed wobbly when the Fed last met in September, has since stabilized. Consumer spending has remained strong, and overall growth looks solid. Those developments suggest that rates might not need to come down as much or as quickly in order to keep the economy steady.

And if Mr. Trump follows through on his campaign promises, they could make it more difficult for the Fed to continue lowering interest rates as quickly. He has pledged a combination of tax cuts, tariffs and deportations that economists and Wall Street investors think could fuel inflation.

“The main takeaway is that his election injects a higher degree of uncertainty into the outlook both for growth and for inflation,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.

The Fed will release its decision at 2 p.m., and Jerome H. Powell, its chair, will hold a news conference at 2:30 p.m. Here’s what you need to know about the meeting.

Officials are cutting rates because inflation is cooling.

Fed officials are cutting interest rates for a simple reason. Inflation has been steadily cooling, and policymakers no longer think that borrowing costs need to be at a two-decade high to wrestle it back under control.

Central bankers lifted rates sharply in 2022 and 2023, then held them at about 5.33 percent for more than a year. By making it more expensive to borrow money, they were hoping to weigh down consumption, business expansions and the labor market. As economic conditions moderated, the logic went, companies would no longer need — or be able — to raise prices so quickly.

Inflation did cool after 2022, and price increases are now nearly back to the Fed’s 2 percent goal.

These days, policymakers think that it could be risky to leave rates too high for too long, putting the job market under threat.

Unemployment ticked up notably earlier this year, which was a major reason that the Fed cut rates by a larger-than-usual half point in September, to 4.8 percent. Officials did not want to fall behind the curve and risk a recession.

This rate cut is likely to be smaller.

But even before Tuesday’s election, this week’s rate cut was expected to be a more standard quarter-point reduction.

When Fed officials released economic forecasts in September, they predicted two more normally sized cuts this year, which would imply one at this meeting and one at their final meeting of the year on Dec. 18.

There’s a reason for that more measured pace. The Fed has not finished taming inflation, and the unemployment rate has held roughly steady in recent months. As a result, a rapid series of rate cuts may not be needed to keep the economy chugging along.

“My preference would be to avoid outsized moves,” Jeff Schmid, the president of the Federal Reserve Bank of Kansas City, said in an Oct. 21 speech.

Watch the news conference for (some) hints about the future.

Fed officials are not scheduled to release fresh economic projections again until December, but Mr. Powell’s news conference could give a hint of what is coming next.

Economists and investors do not see a rate cut next month as guaranteed.

“I wouldn’t say December is a sure bet, though I do think there’s a bias to cut in December,” said Michael Feroli, chief U.S. economist at J.P. Morgan.

And after the election, the path in 2025 is even more uncertain. If Mr. Trump is carrying out policies that push up inflation, as financial markets seem to expect, they could make it hard for the Fed to cut rates so much.

Mr. Powell is sure to field questions about the political outlook at his news conference, but he may avoid answering them. The Fed is politically independent, and officials often try to avoid commenting on White House and congressional policy.

“He’ll probably get asked a lot about the election,” Mr. Feroli said. “He’ll do his best, for 45 minutes, to not answer that type of question.”

When will the Fed take Trump policies into account?

Even if the Fed strives to be apolitical, it exists in a political world. (In fact, the Fed’s meeting this month is a day later than usual, a delay meant to give officials and staff time to vote before flying to Washington for the two-day gathering.)

Given the changing government backdrop, officials may soon need to begin taking Mr. Trump’s plans into account as they consider their own policy outlook.

If Fed policymakers cut interest rates at a slow but steady clip over the coming months only to discover that high tariffs, tax cuts and other inflationary policies move from campaign promises to reality, those rate reductions might look like a mistake with the benefit of hindsight.

Monetary policy is often compared to an aircraft carrier: Its effects on the economy trickle out gradually, so it is hard to change direction rapidly.

“To wait until you know the policy specifics” might “mean that you’re setting yourself up to be behind the curve,” Ms. Uruci said.

In 2016, when Mr. Trump was elected to his first term, Fed staff members and officials discussed the event at length during their December meeting — the word “election” surfaced 72 times, based on a transcript from the gathering. Staff members gave estimates of how much tariffs might push up inflation.

But policymakers seemed to view the election as an input into the economic picture, not as a game-changer that required a more immediate reaction.

The Fed could take that approach again this time.

“What they probably will do, and need to do, is start to think about a lot of what-ifs,” said Donald Kohn, a former vice chair of the Fed and now a senior fellow at the Brookings Institution. “They can’t react until there’s a concrete proposal.”