Federal Reserve rate cut/ Fed benchmark rate/ U.S. inflation update/ Powell Fed decisions/ interest rates forecast 2025/ WASHINGTON/ Newslooks/ J.Mansour/ Morning Edition/ The Federal Reserve cut its benchmark interest rate by a quarter-point to 4.3%, marking its third reduction this year. However, policymakers signaled fewer cuts in 2025 than previously anticipated, citing persistent inflation and caution as rates approach a “neutral” level.
Fed Cuts Rates Again, Signals Slower Reductions Ahead: Quick Looks
- Key Rate: Benchmark rate reduced by 0.25% to 4.3%.
- Inflation Factor: Inflation remains above the Fed’s 2% target at 2.8%.
- Future Cuts: Only two rate reductions expected in 2025, down from four.
- Neutral Level: Fed nears a rate level intended to neither spur nor hinder growth.
- Economic Impact: Borrowing costs likely to remain high for mortgages and loans.
- Trump Factor: President-elect’s tax cuts and tariffs could impact Fed decisions.
- Global Context: Other central banks, including the ECB, also easing rates.
Fed Cuts Rate By Quarter-Point, Signals Slower Relief Ahead
Deep Look
The Federal Reserve reduced its benchmark interest rate by a quarter-point to 4.3% on Wednesday, marking its third cut this year. However, the central bank tempered expectations for further reductions in 2025, projecting a more cautious approach amid persistent inflation and ongoing economic growth.
Slower Path Forward
Fed policymakers indicated they now expect only two rate cuts in 2025, down from the four anticipated in September. The revised outlook reflects concerns over inflation, which remains elevated at 2.8%, still above the Fed’s 2% target.
Chair Jerome Powell emphasized the need for caution as rates approach a “neutral” level, where monetary policy neither stimulates nor restricts the economy:
“Growth is definitely stronger than we thought, and inflation is coming in a little higher. We can afford to be a little more cautious as we try to find neutral.”
Borrowing Costs Remain High
Despite the rate cut, borrowing costs for consumers and businesses remain elevated. The average 30-year mortgage rate was 6.6% last week, far above the pre-pandemic average of around 3%. Rates for auto loans, credit cards, and other borrowing have similarly stayed high.
Persistent Inflation and Robust Economy
While inflation has significantly decreased from its 2022 peak of 7.2%, it remains sticky, raising concerns about the pace of future cuts. Meanwhile, the economy continues to grow robustly, as evidenced by strong retail sales and consumer spending.
Some analysts worry that further rate reductions could overstimulate the economy, making inflation harder to control.
Trump’s Policies Add Uncertainty
The incoming Trump administration’s economic policies could complicate the Fed’s path forward. Proposals for tax cuts on Social Security benefits, tipped income, and overtime earnings, coupled with reduced regulations, may spur economic growth but also risk fueling inflation.
Additionally, Trump’s threats to impose tariffs and pursue mass deportations of migrants could further pressure inflation and disrupt labor markets.
Powell acknowledged the uncertainty:
“We won’t know the impact of these policies until more details emerge and their likelihood of enactment becomes clearer.”
Global Trends in Rate Cuts
The Federal Reserve’s actions align with a broader global trend. The European Central Bank recently lowered its key rate for the fourth time this year, reducing it to 3% as inflation in the eurozone fell to 2.3% from a peak of 10.6% in late 2022.
Balancing Act
As the Fed works to achieve a “soft landing” for the economy—reducing inflation without triggering a recession—it faces a delicate balancing act. The latest decision reflects a cautious approach, recognizing both progress made and challenges ahead.
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