WASHINGTON — Individuals in the United States looking for reduced borrowing expenses for mortgages, credit cards, and auto loans may end up feeling frustrated following the recent Federal Reserve meeting. The Fed is expected to indicate a decrease in the number of anticipated interest rate reductions in the coming year.
Officials plan to lower the benchmark interest rate by a quarter point to approximately 4.3% when their meeting concludes on Wednesday. This adjustment will bring the rate down to a full percentage point below its highest point, which was reached in July 2023 after staying at that peak for over a year in an effort to manage inflation. In recent months, the Fed has made two cuts: half a point in September and another quarter-point subsequently.
Despite inflation dropping significantly from its peak of 9.1% in mid-2022, it continues to stay above the Fed’s target of 2%. Consequently, under the leadership of Chair Jerome Powell, the Fed is projected to communicate a shift towards a more gradual approach for rate reductions through 2025. Economists predict the central bank may only cut rates in every other meeting, or perhaps even less frequently moving forward.
“We’re approaching a point where they will likely not reduce rates in every meeting,” remarked David Wilcox, a former senior Fed official and an economist at Bloomberg Economics. “They’re going to decelerate the pace of cuts.”
The economic landscape has turned out better than officials had anticipated as recently as September, and inflationary pressures have proven to be more enduring. The upcoming presidential election introduces additional uncertainty: President-elect Donald Trump has vowed to implement policies, including substantial import taxes and increased deportations, which many economists believe could further drive up inflation rates.
“The economy is definitely showing stronger growth than we expected, with inflation remaining somewhat elevated,” Powell highlighted recently. “The positive aspect is that we can afford to be a little more cautious” as officials aim to adjust rates to what they consider a ‘neutral’ position — one that neither fosters nor hinders growth.
On Wednesday, officials will also present their quarterly forecasts regarding growth, inflation, unemployment, and their benchmark interest rate projections over the next three years. In their previous meeting, they had envisioned cutting rates four times in the upcoming year. Current expectations from economists point towards just two or three reductions in 2025. Market traders on Wall Street anticipate even fewer cuts, predicting only two based on futures pricing.
If the Fed opts for fewer rate cuts, consumers and businesses will likely continue to grapple with borrowing costs—especially for mortgages—that significantly exceed those witnessed prior to the inflation surge that began over three years ago.
Some economists question whether the Fed even needs to proceed with a cut this week. Inflation, excluding the more volatile categories of food and energy, has consistently hovered at around 2.8% annually since March. A year ago, the Fed had projected that figure would decline to 2.4% by now, expecting to reduce its key rate by three-quarters of a percentage point. Instead, inflation remains elevated, with the Fed poised to lower its benchmark rate by a cumulative full point following the Wednesday meeting.
Officials maintain, including Powell, that they foresee inflation gradually declining even if slowly, while their key rate remains sufficiently high to rein in growth. Therefore, the rate cut this week is likened to easing off the brakes rather than accelerating.
Uncertainty surrounding potential shifts to tax, spending, and immigration policies under Trump compounds the Fed’s cautious approach. Former Fed economists suggest that the central bank’s staff has likely begun incorporating the impacts of Trump’s proposed corporate tax breaks into their evaluations, although assessing the effects of tariffs and deportations is more complex without specific details provided.
Tara Sinclair, an economist from George Washington University who previously served at the Treasury Department, posited that the ambiguity surrounding Trump’s policy proposals might lead to a more conservative approach by the Fed, leading them to implement rate cuts in a more measured fashion, if at all.
“It seems simpler to justify not cutting rates than to put themselves in a position where a rate hike becomes necessary in the current political environment,” Sinclair noted.
Powell has articulated that the Fed aims to decrease its rates to what’s termed the ‘neutral’ level. However, there is considerable divergence among policymakers regarding where this neutral benchmark resides. Many economists estimate it to be between 3% and 3.5%, with some suggesting it may be higher.
Richard Clarida, a former vice-chair of the Fed now with PIMCO, indicated that if inflation remains persistently above the Fed’s targeted level, the central bank is likely to raise rates above this neutral range.
During the period from July to September, the economy achieved a strong growth rate of 2.8% annually. On Tuesday, further insights will be provided through the release of November retail sales figures, which are anticipated to reflect robust consumer demand.
“There don’t seem to be any indicators of weakness emerging at this stage,” mentioned David Beckworth, a senior fellow at the Mercatus Center at George Mason University. “In my view, I do not see the justification for rate cuts.”