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The Federal Reserve cut its key interest rate Wednesday by a quarter-point — its third cut this year — but also signaled that it expects to reduce rates more slowly next year than it previously envisioned, largely because of still-elevated inflation.
The Fed’s 19 policymakers projected that they will cut their benchmark rate by a quarter-point just twice in 2025, down from their previous estimate in September of four rate cuts. Their new quarterly projections suggest that consumers may not enjoy much lower rates next year for mortgages, auto loans, credit cards and other forms of borrowing.
Fed officials have underscored that they are slowing their rate reductions as their benchmark rate nears a level that policymakers refer to as “neutral” — the level that is thought to neither spur nor hinder the economy.
Wednesday’s projections suggest that policymakers may think they are not very far from that level. Their benchmark rate stands at 4.3% after Wednesday’s move, which followed a steep half-point reduction in September and quarter-point cut last month.
Beth Hammack, president of the Fed’s Cleveland branch, dissented from the decision because she preferred to keep rates unchanged. It was the first dissent by a Fed committee member since September.
This year’s Fed rate reductions have marked a reversal after more than two years of high rates, which largely helped tame inflation but also made borrowing painfully expensive for American consumers.
But now, the Fed is facing a variety of challenges as it seeks to complete a “soft landing” for the economy, whereby high rates manage to curb inflation without causing a recession. Chief among them is that inflation remains sticky: According to the Fed’s preferred gauge, annual inflation was 2.8% in October, the same as in March and still persistently above the central bank’s 2% target.
President-elect Donald Trump has proposed a range of tax cuts — on Social Security benefits, tipped income and overtime income — as well as a scaling-back of regulations. Collectively, these moves could stimulate growth.
At the same time, Trump has threatened to impose a variety of tariffs and to seek mass deportations of migrants, which could accelerate inflation.
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