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The Federal Reserve cut its key interest rate Thursday by a quarter-point in response to the steady decline in the once-high inflation that had angered Americans and helped drive Donald Trump’s presidential election victory this week.
The rate cut follows a larger half-point reduction in September, and it reflects the Fed’s renewed focus on supporting the job market as well as fighting inflation, which now barely exceeds the central bank’s 2% target.
Asked at a news conference how Trump’s election might affect the Fed’s policymaking, Chair Jerome Powell said that “in the near term, the election will have no effects on our (interest rate) decisions.”
But Trump’s election, beyond its economic consequences, has raised the specter of meddling by the White House in the Fed’s policy decisions. Trump has argued that as president, he should have a voice in the central bank’s interest rate decisions. The Fed has long guarded its role as an independent agency able to make difficult decisions about borrowing rates, free from political interference. Yet in his previous term in the White House, Trump publicly attacked Powell after the Fed raised rates to fight inflation, and he may do so again.
Asked whether he would resign if Trump asked him to, Powell, who will have a year left in his second four-year term as Fed chair when Trump takes office, replied simply, “No.”
Powell said that in his view, Trump could not fire or demote him: It would “not be permitted under the law,” he said.
Thursday’s Fed rate cut reduced its benchmark rate to about 4.6%, down from a four-decade high of 5.3%. The Fed had kept its rate that high for more than a year to fight the worst inflation streak in four decades. Annual inflation has since fallen from a 9.1% peak in mid-2022 to a 3 1/2-year low of 2.4% in September.
When its latest policy meeting ended Thursday, the Fed issued a statement noting that the “unemployment rate has moved up but remains low,” and while inflation has fallen closer to the 2% target level, it “remains somewhat elevated.”
After their rate cut in September — their first such move in more than four years — the policymakers had projected that they would make further quarter-point cuts in November and December and four more next year. But with the economy now mostly solid and Wall Street anticipating faster growth, larger budget deficits, and higher inflation under a Trump presidency, further rate cuts may have become less likely. Rate cuts by the Fed typically lead over time to lower borrowing costs for consumers and businesses.
Powell declined to be pinned down Thursday on whether the Fed would proceed with an additional quarter-point rate cut in December or the four rate cuts its policymakers penciled in for 2025.
Diane Swonk, chief economist at accounting giant KPMG, said she thought Powell was reluctant to provide hints about the Fed’s next moves because of the uncertainty caused by Trump’s election victory.
“He’s not willing to go too far out ahead of his skis, given how much could change,” she said. “In an environment where you don’t know how promises on the campaign trail translate to actual policies, you don’t want to front-run it.”
Still, Matthew Luzzetti, an economist at Deutsche Bank, said there were signs that the Fed might end up announcing fewer rate cuts next year than many economists expect. The job market and the economy are looking healthier than they appeared in September when the Fed announced an outsize half-point rate cut.
“Nothing in the economic data,” Luzzetti said, “suggests that the (Fed) has any need to be in a hurry” to get rates down substantially.”
On Thursday, Powell did express confidence that inflation, despite some recent higher-than-expected readings, would keep falling back to the Fed’s target.
“We feel like the story is very consistent with inflation continuing to come down on a bumpy path over the next couple of years, and settling around 2%,” he said.
The economy is clouding the picture by flashing conflicting signals, with growth solid but hiring weakening. Consumer spending, though, has been healthy, fueling concerns that there is no need for the Fed to reduce borrowing costs and that doing so might overstimulate the economy and even re-accelerate inflation.
Financial markets are throwing yet another curve at the Fed: Investors have pushed up Treasury yields since the central bank cut rates in September. The result has been higher borrowing costs throughout the economy, thereby diminishing the benefit to consumers of the Fed’s half-point cut in its benchmark rate, which it announced after its September meeting.
Broader interest rates have risen because investors are anticipating higher inflation, larger federal budget deficits, and faster economic growth under President-elect Trump. Trump’s plan to impose at least a 10% tariff on all imports, as well as significantly higher taxes on Chinese goods, and to carry out a mass deportation of undocumented immigrants would almost certainly boost inflation. This would make it less likely that the Fed would continue cutting its key rate. Annual inflation as measured by the central bank’s preferred gauge fell to 2.1% in September.
Economists at Goldman Sachs estimate that Trump’s proposed 10% tariff, as well as his proposed taxes on Chinese imports and autos from Mexico, could send inflation back up to about 2.75% to 3% by mid-2026.
The economy grew at a solid annual rate just below 3% over the past six months, while consumer spending — fueled by higher-income shoppers — rose strongly in the July-September quarter.
But companies have scaled back hiring, with many people who are out of work struggling to find jobs. Powell has suggested that the Fed is reducing its key rate in part to bolster the job market. If economic growth continues at a healthy clip and inflation climbs again, though, the central bank will come under pressure to slow or stop its rate cuts.
Asked at his news conference about Americans who are feeling little relief from the pain of high prices and who helped fuel Trump’s victory, Powell said:
“It takes some years of real wage gains for people to feel better, and that’s what we’re trying to create, and I think we’re well on the road to creating that. Inflation has come way down, the economy is still strong here, and wages are moving up, but at a sustainable level.
“I think what needs to happen is happening, and for the most part has happened, but it will be some time before people regain their confidence and feel that.”
For now, the US presidential election results haven’t shifted the Federal Reserve’s plans.
As widely expected, the central bank cut the federal funds rate by 0.25 percentage points to a target range of 4.50%-4.75%. The Fed has cut a cumulative 0.75 points since it started lowering rates in September 2024. Before that, the target had been on a lofty plateau of 5.25%-5.50% since July 2023.
Now investors are trying to glean insights on the Fed’s mindset for future rate cuts. Expectations have shifted significantly in the past two months. As of early September, market participants thought the federal-funds rate would drop to 2.75%-3.00% by the end of 2025 and remain there in the following years. But they now expect a year-end 2025 rate of 3.75%-4.00%, a full 100 basis points higher.
The main reason for this shift is that concerns about a weakening economy and labor market have diminished. In particular, recession worries cropped up with the rise in the unemployment rate through August 2024, but unemployment has ticked down in the last two months’ job reports. Likewise, strong GDP growth in the third quarter and other data have shown the economy growing steadily.
Another factor in the change in expectations is Donald Trump’s electoral victory. Trump’s proposed tariffs could raise inflation. Also, a Republican Party sweep of Congress would create the possibility of more deficit spending via tax cuts and defense. Both scenarios would call for a more restrictive monetary policy.
Regarding the Fed’s next meeting in December 2024, the market-implied probability of a 25-point rate cut is about two-thirds, while there’s a one-third probability of no cut.
Fed Chair Jerome Powell was fairly reticent on the election. He said it would have “no effect” on decisions in the near term, and that the central bank would wait until new government policies are in place before making any adjustments to monetary policy. He said acting based on speculation about policy would be inappropriate.
Elsewhere, Powell refrained from giving much guidance on the future course of rate cuts. He reiterated that the Fed will not provide “forward guidance” at the moment, meaning it won’t actively seek to shape market expectations. Instead, the central bank is letting expectations fall where they may and making decisions on a meeting-by-meeting basis.
Following Powell’s lack of firm guidance, market expectations for a rate cut at the December Fed meeting didn’t move much today. Nor did bond yields (reflecting future rate cuts) move much. We expect the Fed to cut its target rate range by 25 basis points in December.
While prices for most goods have been falling throughout the year, inflation for a wide range of services remains high. That has put a strain on consumers eating out, servicing their cars, and paying for various kinds of insurance.
Prices for services rose 3.7% in September from a year ago, according to the personal consumption expenditures price index, the inflation gauge of choice for the Federal Reserve. Prices for goods, though, have been falling, which has helped cool the overall rate of inflation nearly back to the Fed’s goal of 2%.
Restaurants, with traditionally tight margins and tough competition for diners’ dollars, are among the harder-hit sectors dealing with stubborn inflation. Food services inflation rose 3.6% in September. Chains including Chipotle, McDonald’s, and others say they expect inflation pressure from wages to continue.
Higher wages drive up costs for restaurants, often prompting menu prices to also rise. Pressure from rising wages increased following mandatory increases in minimum wages in California.
McDonald’s and other restaurants have tried to attract more cautious consumers with menu deals as the price of eating out rises compared with eating at home.
Home and car insurance inflation also remains stubbornly high. Household insurance premiums were up 10.1% from a year ago, while auto insurance was up 6%. Companies including Allstate and Progressive have said increased storm damage and more costly parts and labor for repairs are keeping prices high.
The housing market, particularly rent, has been one of the biggest drivers of services inflation. Overall housing costs rose 5.1% in September from a year ago. The travel sector is also facing sticky inflation. Air transportation costs rose 4.1% in September.
Prices for goods fell 1.2% in September and have been easing or cooling since late 2023, but pressure remains for food companies. Many of those companies are hesitant to pass along more price increases to consumers as people become more cautious about spending.
Overall, food and beverage prices rose 1.2% in September, with particularly big increases for items including milk, eggs, and oils. Kraft-Heinz recently warned investors that inflation for things like coffee and dairy products will weigh on its margins and operating income for the year.