On Wednesday, Federal Reserve officials are expected to announce a slower pace of interest rate cuts next year than in recent months, implying that Americans may only see little respite from still-high borrowing costs for mortgages, auto loans, and credit cards.
The Fed is expected to announce a quarter-point reduction in its target rate, from about 4.6% to about 4.3%. The latest adjustment would come after a larger-than-usual half-point rate cut in September and a quarter-point reduction in November.
However, Wednesday’s meeting may herald the beginning of a new phase in the Fed’s policies: instead of cutting rates at each meeting, the Fed is more likely to decrease rates every other meeting — at most. The central bank’s officials may indicate that they anticipate to drop the benchmark rate only two or three times in 2025, rather than the four rate cuts they had planned three months ago.
So far, the Fed has justified its actions by portraying them as a “recalibration” of the ultra-high rates designed to contain inflation, which reached a four-decade peak in 2022. With inflation now significantly lower—at 2.3% in October, according to the Fed’s preferred gauge, down from a top of 7.2% in June 2022—many Fed members say that interest rates do not need to be so high.
However, inflation has remained over the Fed’s 2% objective in recent months, despite the economy’s rapid expansion. On Tuesday, the government’s monthly retail sales data revealed that Americans, particularly those with higher incomes, continue to spend freely. According to some economists, these tendencies heighten the danger that subsequent rate reduction may provide an unduly strong boost to the economy, hence keeping inflation elevated.
In addition, President-elect Donald Trump has suggested a number of tax cuts, including those on Social Security payments, tipped income, and overtime income, as well as a reduction in regulations. These initiatives, taken together, have the potential to drive growth. At the same time, Trump has vowed to implement a range of tariffs and mass deportations of migrants, potentially accelerating inflation.
Chair Jerome Powell and other Fed officials have stated that they will not be able to judge how Trump’s ideas will effect the economy or their own rate choices until more information is available and it is evident how likely the president-elect’s initiatives will be implemented. Until then, the outcome of the presidential election has largely increased economic uncertainty.
In any case, it is unlikely that Americans will benefit from significantly lower borrowing prices in the near future. According to mortgage giant Freddie Mac, the average 30-year mortgage rate was 6.6% last week, down from its top of 7.8% in October 2023. However, the around 3% mortgage rates that persisted for nearly a decade before the pandemic are unlikely to resurface in the near future.
Fed officials have stated that they are halting their rate cuts as the benchmark rate approaches a level that policymakers refer to as “neutral” — the level that neither stimulates nor depresses the economy.
“Growth is definitely stronger than we thought, and inflation is coming in a little higher,” Powell told reporters recently. “So the good news is, we can afford to be a little more cautious as we try to find neutral.”
Most other central banks around the world are likewise lowering their benchmark rates. Last week, the European Central Bank cut its key interest rate for the fourth time this year, to 3% from 3.25%, as inflation in the eurozone’s 20 countries fell to 2.3% from 10.6% in late 2022.