The Federal Reserve will likely focus on business at hand when it wraps up its meeting on Thursday with another rate cut, but will look to the future against a backdrop that has suddenly become much more complicated.

Financial markets are almost certainly pricing in that the Federal Open Market Committee will cut its benchmark borrowing costs by a quarter of a percentage point as it seeks to “recalibrate” policy for an economy where inflation and the labor market are weakening. soften.

But the focus will turn to what lies ahead for Chairman Jerome Powell and his Fed colleagues as they navigate a changing economy – and the political earthquake of Donald Trump's stunning victory in the presidential race.

“We believe Powell will refuse to make an early judgment on the impact of the election on the economy and interest rates and will seek to be a source of stability and calm,” said Krishna Guha, head of global policy – and central bank strategy at Evercore ISI, according to a statement issued before the election results were announced.

Consistent with policymakers' historic desire to stay above the political fray, Powell will “say the Fed will take the time it needs to study the new administration's plans” and then “refine that assessment.” “while actual policy measures are developed and implemented,” Guha added.

While the immediate action will be to stay the course and enforce the 25 basis point cut, the market's attention will likely turn to what the committee and Powell have to say about the future. The key interest rate, which determines how much banks charge each other for overnight loans but often also influences consumer debt, is currently targeted at a range between 4.75% and 5.0%.

Market prices currently favor another quarter-point cut in December, followed by a pause in January and multiple cuts through 2025.

But if Trump's agenda – tax cuts, higher spending and aggressive tariffs – is put into action, it could have a significant impact on the Fed, which is trying to adjust policy after huge interest rate hikes to control inflation. Many economists believe another round of isolationist economic measures from Trump could revive inflation, which remained below 3% throughout Trump's first term despite a similar recipe.

Trump was a frequent critic of Powell and the Fed during his first term from 2017 to 2021 and favored low interest rates.

“Everyone is waiting for future rate cuts and whether something will be announced,” said Quincy Krosby, chief global strategist at LPL Financial. “But there is also the question of whether they can declare victory on inflation.”

Answering those questions would largely be left to Powell's post-meeting press conference.

Although the committee will release its joint decision on interest rates, it will not provide an update to its Summary of Economic Outlooks, a quarterly document that includes consensus updates on inflation, GDP growth and unemployment, as well as the anonymous “dot plot” of individual officials' interest rate expectations.

Beyond the January pause, there is significant market uncertainty about where the Fed is headed. The next update of the SEP will take place in December.

“What we’re going to hear more and more about is the final interest rate,” Krosby said. “That will come back into the lexicon if yields continue to rise, and it is not fully linked to growth.”

Traders in the Fed funds futures market are betting on an aggressive pace of rate cuts that would push the federal funds rate to a target range of 3.75% to 4.0% by the end of 2025, or a full percentage point below current levels after the half percentage point in September Point cut. The secured overnight lending rate for banks is slightly more cautious, suggesting a short-term interest rate of around 4.2% at the end of next year.

“A key question here is: What is the end of this rate-cutting cycle?” said Bill English, the former head of the Fed's monetary division and now a finance professor at the Yale School of Management. “You're going to have to start thinking pretty soon about where we think this rate cutting period is going to change when the economy is looking pretty strong. They might want to take a break soon and see how things turn out.”

Powell could also be asked to address the Fed's current moves to reduce the amount of bonds on its balance sheet.

Since the effort began in June 2022, the Fed has trimmed nearly $2 trillion from its holdings of Treasury and mortgage-backed securities. Fed officials have said balance sheet shrinking can continue even if interest rates are cut, although Wall Street expects the runoff to end as early as early 2025.

“They've just been happy to let it fade into the background and will probably continue to do so,” English said. “But there will be a lot of interest in the next meetings. At what point will they make further adjustments to the pace of the runoff elections?”