01:48 PM EST, 12/16/2024 (MT Newswires) -- The Federal Reserve is likely to cut interest rates by 25 basis points this week, but it could signal caution regarding the pace of potential monetary policy easing going forward, Saxo Bank said Monday.

Markets widely expect the central bank's Federal Open Market Committee to deliver a quarter-percentage-point reduction in its benchmark lending rate Wednesday, according to the CME FedWatch tool. That would mark a second consecutive 25-basis-point decrease following a 50-basis-point reduction in September.

The latest official US consumer inflation data showed an easing in shelter cost growth, while the most recent jobs report indicated an increase in the unemployment rate and a decline in labor force participation. These factors are likely to prompt the FOMC to cut rates by 25 basis points later this week, Saxo Bank Chief Investment Strategist Charu Chanana said in a report published Monday.

However, there is a "growing chatter" about policymakers possibly skipping a rate cut next month amid factors such as persistent inflation in certain areas and continued economic resilience, according to the report. "With the new Trump administration likely to focus on trade tariffs early on after taking office on (Jan. 20), there is risk that it could create upside risks to inflation, which could make the Fed more cautious about future cuts," Chanana wrote.

The December rate decision will be accompanied by the FOMC's updated economic projections.

Revised estimates could indicate three or even two rate cuts next year, down from four projected in the previous iteration, amid elevated inflation risks, according to Saxo Bank. If the 2025 dot plot signals only two cuts, that would be "a considerable hawkish surprise" for the market, Chanana said.

The firm also sees the potential for 2026 projections indicating two rate cuts, reflecting a slower normalization path. The updated Summary of Economic Projections document is expected to show higher 2024 core inflation, as measured by personal consumption expenditures, as well as lower unemployment and stronger economic growth than projected in September, according to the report.

If the FOMC indicates fewer rate cuts next year than previously projected, risk assets such as equities could see "renewed volatility," Saxo Bank said.

"A hawkish tone could put downward pressure on equity valuations, especially growth stocks that are more sensitive to higher rates," Chanana wrote. "Other interest rate-sensitive sectors, such as homebuilders and small-caps, could also face headwinds. Investors may consider rotating into defensive sectors like utilities and consumer staples if the Fed signals a slower pace of cuts."