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Monetary policymakers at the US Federal Reserve are likely to recommend smaller interest rate cuts next year than previously expected.

Officials are preparing to reduce the base interest rate, which affects many consumer and commercial loans, by a quarter of a percentage point to about 4.3%, when their meeting ends the day after tomorrow, Wednesday.

At this level, the interest rate would be a full point below its highest level in four decades, reached in July 2023.

Monetary policy makers had kept the key interest rate at its peak for more than a year in an attempt to limit inflation, before cutting it by half a point in September and a quarter of a point last month.

Low unemployment rate

The problem is that while the unemployment rate has fallen sharply from its record level of 9.1% in mid-2022, it is still higher than the Federal Reserve’s target of 2%.

As a result, the Council, headed by Jerome Powell, is expected on Wednesday to indicate a shift towards a more gradual approach to rate cuts over the next year.
Analysts say that after cutting rates three times in a row, the central bank will likely cut rates once every few meetings, and perhaps at a slower pace than that.

Slow down the pace of cuts

“We are on the cusp of a transition in which there will not be a rate cut at every meeting,” says David Wilcox, a former Fed official and economic analyst at Bloomberg Economics and the Peterson Institute for International Economics. “They will slow down the pace of cuts,” referring to Federal Reserve officials.

What enhances the chances of slowing the pace of interest cuts in the United States is that the American economy achieved stronger growth than expected during the third quarter of this year.
Inflation remains at high levels for longer than expected.