WASHINGTON — Americans anticipating reduced borrowing costs for homes, credit cards, and cars may face disappointment following this week’s Federal Reserve meeting. The Fed’s policymakers are expected to indicate fewer interest rate cuts in the coming year than previously anticipated.
Officials plan to lower their benchmark interest rate by a quarter-point to approximately 4.3% when their meeting concludes Wednesday. This adjustment will bring the rate down to a full point below the four-decade high recorded in July 2023. For over a year, the Fed maintained its peak rate to combat inflation, including a half-point cut in September and a quarter-point last month.
Despite a significant decrease in inflation from its peak of 9.1% in mid-2022, it remains above the Fed’s 2% target. Consequently, under the leadership of Chair Jerome Powell, the Fed is anticipated to communicate a shift towards a more gradual approach to rate cuts, likely starting in 2025. Economists predict that after a trend of consecutive cuts, the central bank will move towards a more spaced-out reduction schedule.
“We’re approaching a transition where they won’t be cutting rates at every meeting,” noted an economist, emphasizing that the pace of cuts will slow.
The economy has performed better than officials anticipated just a month ago, with persistent inflation pressures continuing to challenge the Fed. The upcoming presidential election introduces further uncertainty, as new policies proposed by the President-elect could exacerbate inflationary trends.
“Growth is definitely stronger than we expected, and inflation remains more elevated,” Powell stated recently. “This allows us to exercise a little more caution” as the Fed seeks to achieve what they consider a “neutral” interest rate that neither stimulates nor restrains economic growth.
During Wednesday’s meeting, policymakers will also share their quarterly outlook for growth, inflation, unemployment, and interest rates for the upcoming three years. Previously, they anticipated four rate cuts next year; however, economists now predict only two or three cuts in 2025, with market forecasts hinting at even fewer.
Fewer rate cuts would mean households and businesses continue facing higher loan rates, particularly for mortgages, compared to levels before the inflation spike began over three years ago.
Some economists argue the Fed may not even need to cut rates this week, as inflation excluding food and energy has stabilized around 2.8% since March. A year prior, officials had projected this rate to decline further and anticipated more significant reductions in the benchmark rate. However, inflation has remained stubbornly high, even with the Fed’s previous rate cuts.
Fed officials, including Powell, maintain expectations of a gradual decline in inflation while the key rate remains elevated enough to limit growth. Thus, the current rate reduction mirrors easing off the brakes rather than accelerating progress.
With potential policy shifts on taxes, spending, and immigration, the Fed continues to adopt a cautious stance. Previous economic analyses are now factoring in expected impacts from proposed corporate tax cuts, while tariffs and immigration changes remain challenging to quantify.
Economic uncertainties tied to proposed policy changes could prompt the Fed to adopt a more conservative approach to rate cuts moving forward.
Powell emphasizes the Fed’s goal of achieving the so-called “neutral” interest rate. However, there is significant debate among policymakers regarding the appropriate level, with estimates ranging between 3% and 3.5%, and some suggesting it could be higher.
In the recent quarter, the economy showed robust growth of 2.8%. Upcoming reports on November retail sales are expected to reflect strong consumer spending, indicating overall economic resilience.
“Overall, there are no signs of weakness emerging,” stated an economist. “In my view, there is little justification for aggressive rate cuts.”
