Federal Reserve Likely to Cut Rates    12/10 06:02

   The Federal Reserve will almost certainly reduce its key interest rate 
Wednesday, but the bigger question for financial markets and the economy is 
what signals Chair Jerome Powell may send regarding the central bank's next 
steps.

   WASHINGTON (AP) -- The Federal Reserve will almost certainly reduce its key 
interest rate Wednesday, but the bigger question for financial markets and the 
economy is what signals Chair Jerome Powell may send regarding the central 
bank's next steps.

   It would be the third cut in a row and bring the Fed's key rate to about 
3.6%, the lowest in nearly three years. For Americans struggling with high 
borrowing costs for homes, cars, and other large purchases, this year's rate 
cuts could reduce those costs over time -- though it's not guaranteed. Mortgage 
rates in particular are also influenced by financial markets.

   This week's meeting could presage a much cloudier path for the Fed in 2026. 
The government shutdown has delayed two months of jobs and inflation data, 
leaving the Fed with much less information hiring and inflation than it is used 
to. Powell's term as chair ends in May and President Donald Trump will nominate 
a replacement, possibly as soon as this month, who will almost certainly push 
for lower borrowing costs. Yet the new chair could face resistance from other 
Fed officials.

   In addition to a likely rate cut, the Fed could signal that the bar for 
another reduction when they next meet in late January will be higher than it 
has been this fall. A year ago, after implementing a third rate cut at its 
December meeting, the Fed indicated it would likely keep rates unchanged in the 
coming months. It didn't cut again until September.

   "They would love to take a pass (in January), push it off to March, and just 
wait for a couple of more inflation reports to come in," Tom Porcelli, chief 
economist at Wells Fargo, said.

   The Fed's 19-member rate-setting committee is deeply divided between those 
who support reducing rates to bolster hiring and those who'd prefer to keep 
rates unchanged because inflation remains above the central bank's 2% target. 
Higher borrowing costs can slow spending and the economy and reduce price 
increases.

   The government said last week in a delayed report that the Fed's preferred 
inflation gauge stayed elevated in September, with both overall and core prices 
rising 2.8% from a year earlier.

   The lack of economic data has contributed to the divisions. But by their 
January meeting, they'll have up to three months of backlogged reports to 
consider. If those figures show that hiring has remained weak, or that layoffs 
have spiked, then the Fed could reduce rates again in January.

   By contrast, if they show hiring has stabilized while inflation remains 
elevated, they may hold off on additional cuts for several months.

   On Wednesday, the Fed will also issue their quarterly set of economic 
projections, which include forecasts for where they will set rates at the end 
of this year and next. Economists expect just one rate reduction next year, as 
they did in September.

   Yet the projections will likely carry much less weight this year, since a 
new chair will probably push for more reductions. And if the economy weakens, 
more officials will support reductions.

   In an interview with Politico published Tuesday, Trump said "yes" when asked 
if reducing rates "immediately" was a litmus test for his new Fed chair. Trump 
has hinted that he will likely pick Kevin Hassett, his top economic adviser.

   Hassett has often called for lower borrowing costs, but this week has been 
more circumspect. In an interview Tuesday on CNBC, when asked how many more 
rate cuts he would support, Hassett did not give a specific answer and said, 
"What you need to do is watch the data."