Federal Reserve meeting tests stock market optimism

Fed meeting next week to assess rate cuts as stocks rebound; inflation data influences expectations for future policy changes.

The Federal Reserve’s first meeting of 2025 next week will be crucial for U.S. stocks as investors anticipate potential interest rate cuts.

Stocks declined after the December meeting when the Fed revised its rate cut forecast in response to anticipated inflation.

However, recent monthly data indicating a moderation in underlying inflation has provided relief to Wall Street, leading to a rebound in stocks, with the S&P 500 reaching a record high this week.

The Fed is expected to pause its easing cycle during the monetary policy statement on Wednesday. Investors are keen to understand what conditions might lead the Fed to consider resuming rate cuts.

Recent economic data suggests stability, indicating the Fed may not feel pressured to lower rates further until more favourable inflation figures are reported.

The current benchmark rate is between 4.25% and 4.5% following a decrease of one percentage point last year. The easing cycle was initiated after rate increases successfully reduced inflation from 40-year peaks, though it is still above the target of 2%.

Market expectations suggest around 40 basis points more easing, equating to nearly two cuts, by December.