Bracing for a Fed Pullback

Jay Powell, the Fed chair, has indicated that the central bank can be more cautious in its approach to interest rate cuts.Credit…Jeenah Moon for The New York Times

The final cut (for now)?

The Fed is set to wrap up its last policy meeting of the year on Wednesday, with markets essentially convinced that the central bank will lower interest rates for a third time since September.

There may still be drama, however, as investors worry that stubbornly high inflation and volatility from a potential trade war orchestrated by President-elect Donald Trump could force the Fed to go easier on rate-cutting next year.

The central bank is divided on what to do, with a growing number of officials taking a more cautious tone in recent weeks. That could signal an emerging belief among policymakers that borrowing costs should remain higher for longer, the kind of debate that created huge friction between Trump and the politically independent Fed in his first term.

Jay Powell, the Fed chair, has sounded more hawkish lately, too. He told Andrew at the DealBook Summit this month that a “stronger” economy meant that “we can afford to be a little more cautious as we try to find neutral.” That refers to the Fed’s target of achieving an interest rate level that neither encourages nor impedes growth.

Inflation remains a concern. Recent economic data has shown that the Fed’s efforts to tame price rises have largely stalled. (The release on Friday of the Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, should offer more clues.)

That’s adding uncertainty as investors ponder the effects of Trump’s likely economic policies and whether his pledge to lower taxes, crack down on immigration and impose tariffs on trade partners will revive the inflation genie and further muddle the Fed’s rates policy next year.