The Federal Reserve will not change its policy Thursday based on recent election resultsand is all but ready to cut interest rates by a quarter point. The focus will be on what happens at upcoming central bank meetings and whether officials will slow the expected pace of rate cuts.

Powell’s Fed insists it is data-driven, and economic data is mixed. However, overall the trend has been stronger than expected since the Fed’s September meeting. In their recent remarks, Fed officials cited inflation approaching the central bank’s 2% annual target and signs of a slowing labor market as an argument for lowering interest rates. interest at their highest level in two decades. Officials stressed that where the rates go and the path to get there are both uncertain and will depend on incoming data.

The median forecast in policymakers’ September update of their quarterly summary of economic projections was for one percentage point of rate cuts in 2024, followed by another point of reduction in 2025. The FOMC meets at again on December 17 and 18, with futures currently pricing in interest rates. there is about a 70% chance of another quarter point reduction and a 30% chance of no reduction, or “skipping”.

Until then, Fed officials will review inflation data from October and November as well as the November jobs report. If the data comes in hotter than expected – raising questions about whether inflation and the labor market will continue to slow – the case for not cutting rates in December could strengthen. Officials will also update the SEP, or so-called “dot plot,” at this meeting, giving them an opportunity to chart the policy path forward in 2025 and beyond.

“We think it is too early to expect the Fed to consider skipping a meeting,” wrote Tim Duy, chief U.S. economist at SGH Macro Advisors. “If the Fed were to skip or pause (rate cuts) during this cycle, we think it would more likely happen in January than in December… If growth remains high and the labor market strengthens, the The Fed can then signal a more gradual pace of rate cuts, thus postponing the discussion of a pause until 2025.”

We may know more by then about the prospective economic policies of a second Donald Trump administration, many of which could increase inflation and shape the debate over long-term interest rates. For now, officials view the policy as restrictive, implying plenty of room for reduction.

Bond yields have risen sharply since the Fed’s September meeting, propelled by a combination of stronger expected economic growth, faster inflation and wider federal deficits – all potential recipe for the Fed to slow down its softening over time.

The expected five-year inflation rate, calculated Wednesday from prices of regular and inflation-protected Treasury bonds, implies annual inflation of 2.45 percent over the next half-decade, up from about 1. 9% in mid-September.

Long-term bond yields have also increased. The yield on the 10-year U.S. Treasury note was around 4.41% on Wednesday, up some 0.8 percentage points since mid-September. This is a big step forward for the Treasury market, where volatility has been high. The ICE BofAML MOVE Index, the bond market’s version of the Cboe Volatility Index, or VIX, for stocks, is at its highest level in more than a year.

Powell and Co. could push back some of the recent rise in yields, which runs counter to the FOMC’s easing goals.

“I think they would want to cap rates,” said Adam Abbas, head of fixed income at investment firm Harris | Oak mark. “I think Powell will focus on slowing (inflation), slowing wages and increasing labor supply.”

Economist Ed Yardeni, president of Yardeni Research, expects to see more dissenting votes Thursday against a rate cut, after Gov. Michelle Bowman voted against it in September. She would then have preferred a reduction of a quarter of a point.

“(Dissidents) might prefer not to fight the Bond Vigilantes for now, given the strong economy, and vote for no cuts on Thursday,” Yardeni wrote. “We can assume that they fear that the US elections will lead to large and persistent federal budget deficits despite strong economic growth, although they avoid commenting on fiscal policy.”

Don’t expect Powell to be particularly forthcoming during his news conference about potential policies during a second Trump term. Officials will wait for the impact of policies to be reflected in economic reports or surveys before considering changes to their interest rate plans.

Powell could be forceful on Thursday in his oft-repeated defense of the Fed’s independence. Trump has said he believes the president should be able to influence central bank decisions. “I think the president should have at least some say, I’m convinced of that,” Trump said at a news conference in August.

Trump frequently clashed with Powell during his first term and discussed replacing him as Fed chair. The president-elect said more recently that he would not seek to oust Powell before his term ends in May 2026.