Americans anticipating for cheaper borrowing costs for homes, credit cards, and automobiles may be disappointed following this week’s Federal Reserve meeting. The Fed’s officials are expected to announce fewer interest rate reduction next year than originally anticipated.
When their meeting concludes on Wednesday, the officials plan to lower their benchmark rate, which affects many consumer and corporate loans, by a quarter point to around 4.3%. At that level, the rate would be a full point lower than it was in July 2023, when it peaked after four decades. To try to keep inflation under control, policymakers left their benchmark rate at its top for more than a year before cutting it by a half-point in September and a quarter-point last month.
The difficulty is that, while inflation has fallen somewhat from its peak of 9.1% in mid-2022, it still remains persistently above the Fed’s 2% target. As a result, the Fed, led by Chairman Jerome Powell, is expected to announce a move to a more gradual approach to rate cuts in 2025. Economists predict that after decreasing rates for three consecutive meetings, the central bank will likely do so every other meeting, or perhaps less frequently.
“We’re on the cusp of a transition to them not cutting every meeting,” said David Wilcox, a former senior Fed official and economist at Bloomberg Economics and the Peterson Institute for International Economics. “They’re going to slow the tempo of cuts.”
The economy has performed better than officials predicted as recently as September. And inflationary pressures have become more persistent. The presidential election also included a wild card. President-elect Donald Trump has promised to execute policies ranging from much higher import taxes to large deportations of people residing illegally in the United States, which most economists believe will exacerbate inflation.
“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 Fed officials attempt to cut interest rates to a “neutral” level that neither stimulates nor inhibits growth.
On Wednesday, policymakers will also release their quarterly estimates for GDP, inflation, unemployment, and the benchmark interest rate for the next three years. In September, they agreed that they will decrease rates four times next year. Economists now forecast only two or three Fed rate cuts in 2025. Wall Street traders expect even fewer cuts: only two, according to futures prices.
If the Fed decreases interest rates less, people and companies will continue to confront lending rates, particularly for home mortgages, that are substantially higher than they were when inflation began to rise more than three years ago.
Some economists doubt whether the Fed should even cut this week. Since March, inflation, excluding volatile food and energy expenses, has remained at an annual pace of around 2.8%. A year ago, policymakers predicted the figure would be down to 2.4% by now, and that they would have dropped their benchmark rate by three-quarters of a point. Instead, inflation has remained at a high level, despite the Fed lowering its target rate by a whole point.
Fed officials, including Powell, have stated that they still expect inflation to fall, if slowly, while the key rate remains high enough to limit growth. As a result, lowering interest rates this week is more akin to letting up on the brakes than pressing on the gas.
The possibility of significant changes to tax, spending, and immigration policy under Trump is another reason for the Fed to be more cautious. Former Fed economists say the central bank’s staff has likely begun to consider the effects of Trump’s proposed corporate tax cuts in their economic studies, but not his proposed tariffs or deportations, because those two proposals are too difficult to estimate without specifics.
Tara Sinclair, a George Washington University economist and former Treasury Department official, suggested that the uncertainty surrounding whether Trump’s policy changes will keep inflation high — necessitating higher rates — could lead the Fed to cut rates more gradually, if at all.
“It seems easier to explain not cutting than to find themselves in a position where they would have to raise rates in this political environment,” Sinclair pointed out.
Powell has stated that the Fed intends to cut rates to the so-called “neutral” level. However, there is widespread dispute among policymakers about how high that rate is. Many economists estimate it at 3% to 3.5%. Some economists believe it may be higher.
And Richard Clarida, a former vice chair of the Fed who is a managing director at PIMCO, said that if inflation becomes stuck above the Fed’s target level, then the policymakers will likely keep rates above the neutral level.
The economy grew at a steady 2.8% annual rate from July to September. On Tuesday, the government will release November retail sales data, which are likely to reflect strong consumer demand.
“There doesn’t seem to be any signs of weakness emerging overall,” said David Beckworth, a senior fellow at George Mason University’s Mercatus Center. “I don’t see in my mind the justification for rate cuts.”
