Federal Reserve officials on Wednesday will likely signal a slower pace of interest rate cuts next year than in the past few months, meaning Americans may enjoy only a slight relief from still-high borrowing costs for mortgages, auto loans and credit cards.
The Federal Reserve is scheduled to announce a quarter-point cut in its benchmark interest rate, from about 4.6% to about 4.3%. The latest move will follow a larger-than-usual rate cut of half a percentage point in September and a quarter-point cut in November.
However, Wednesday’s meeting may mark a shift into a new phase in the Fed’s policies: Instead of cutting interest rates at every meeting, the Fed will likely cut at every other meeting — at most. Central bank policymakers may signal that they expect to cut the key interest rate only two or three times in 2025, rather than the four rate cuts they envisioned three months ago.
So far, the Fed has explained its moves by describing them as a “recalibration” of ultra-high interest rates that were intended to tame inflation, which reached a four-decade high in 2022. With inflation now much lower — at 2.3% in 2022, October, according to the Fed’s preferred measure, down from a peak of 7.2% in June 2022 – Many Fed officials argue that interest rates do not need to be so high.
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But inflation has remained above the Fed’s 2% target in recent months while the economy has continued its rapid growth. On Tuesday, the government’s monthly report on retail sales showed that Americans, especially those with higher incomes, remain willing to spend freely. For some analysts, these trends increase the risk that further interest rate cuts could lead to too strong a boost to the economy, thus keeping inflation high.
Moreover, President-elect Donald Trump has proposed a host of tax cuts — on Social Security, Supplemental Income, and Supplemental Income benefits — as well as reduced regulations. Collectively, these moves can stimulate growth. Meanwhile, Trump has threatened to impose a variety of tariffs and seek mass deportations of immigrants, which could accelerate inflation.
Federal Reserve Chairman Jerome Powell and other Fed officials said they will not be able to assess how Trump’s policies will affect the economy or their interest rate decisions until more details are provided and it becomes clear how likely the president-elect’s proposals are to do so. To be actually enacted. Even then, the results of the presidential election exacerbated the uncertainty surrounding the economy.
Either way, it seems unlikely that Americans will enjoy much lower borrowing costs any time soon. The average interest rate on a 30-year mortgage was 6.6% last week, according to mortgage giant Freddie Mac, below the peak of 7.8% reached in October 2023. But the roughly 3% mortgage rates that have been For nearly a decade before the pandemic it is not. Will be back in the foreseeable future.
Fed officials have confirmed they are slowing interest rate cuts as the benchmark interest rate approaches the level that policymakers refer to as “neutral” — a level that neither stimulates nor hinders the economy.
“Growth is certainly stronger than we thought, and inflation is coming in a little bit higher,” Powell said recently. “So the good news is that we can be a little more cautious while trying to be neutral.”
Most other central banks around the world are also cutting benchmark interest 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 20 countries that use the euro fell to 2.3% from a peak of 10.6% in late 2022.
& Edition 2024 The Canadian Press
