WASHINGTON — The Federal Reserve on Wednesday made another cut in interest rates, but dialed back expectations for lowering rates in the near future.
The rate reduction, the third in a row, had been widely expected, but where policymakers go from here is anything but certain.
Plans for several more rate cuts in 2025 have become muddied as progress the Fed made on curbing inflation has stalled and uncertainties abound about what impact the incoming Trump administration will have on the economy.
The Fed’s new quarter-point rate reduction, coming out of its last policy-setting meeting of the year, will give consumers a bit more relief on interest payments for credit cards, home equity lines and some other personal loans.
The cumulative effects of the three rate cuts since September, totaling a full percentage point, are more meaningful and could help households that are stretched financially. More Californians have fallen behind in making debt payments this year, with delinquency rates on credit cards and auto loans rising especially for millennials in California (ages 28-43), according to the California Policy Lab at UC Berkeley.
The Fed’s recent rate cuts, however, haven’t done a whole lot for potential homebuyers and sellers. The 30-year fixed mortgage rate, while ticking down a little this month, most recently stood at 6.6% last Thursday — which is actually up from about 6% in mid-September, according to Freddie Mac. And analysts don’t see mortgage rates coming down significantly in the near term.
While Wednesday’s rate cut was expected — futures markets gave it a 95% probability before the announcement — the view ahead is muddled by uncertainty over what President-elect Trump might do, on trade as well as fiscal policy.
Trump has talked about cuts in taxes and deregulation, which would likely stimulate economic activity. But Trump also has proposed tariffs on all imports and even higher levies on Chinese goods, which most analysts see as inflationary and a hit to economic growth.
But whether Trump will go through with his threat, and if so, when and by how much, remain highly uncertain.
Beyond questions about the new administration’s intentions, Fed policymakers already had reason to slow their rate-cut plans. The American economy and jobs, while slowing a bit, have kept growing at a solid pace.
At the same time, consumer price inflation, which reached near double digits in the summer of 2022, has recently stopped trending down toward the Fed’s 2% target. Inflation edged up a notch in November, with prices rising 2.7% from a year earlier as consumers paid more for used cars and airline fares, but also staple items like medical care and foods purchased for home. Rising grocery prices, in particular, have gnawed at consumer sentiments, and were seen as a key factor in Trump’s victory in November.
“I think for lower- and moderate-income households, the budgetary battle continues, month in and month out,” said Greg McBride, chief financial analyst at Bankrate.com. “Inflation on everyday necessities continues to be an issue.”
In September, the Fed began its latest rate-cutting scheme by making a big half-point reduction, followed by two quarter-point moves. And based on the trajectory of inflation then, it had forecast four more smaller cuts next year.
But on Wednesday, the Fed’s updated projections showed officials expecting just two quarter-point cuts in 2025 and another two the following year. And analysts say policymakers are likely to pause at their next rate-setting meeting in January.
In their latest projections, most Fed officials said the U.S. economy would grow 2.1% next year, compared with 2.5% this year, which is up significantly from its previous September forecast. They see their preferred measure of core inflation as ending the year at 2.8% and at 2.5% in 2025. The nation’s unemployment rate, which was 4.2% in November, is expected to rise to 4.3% around this time next year.
Wednesday’s announcement takes the Fed benchmark interest rate down to a range of 4.25% to 4.5%. That’s a full percentage point lower than it was in September, but is still considered above the so-called neutral rate that’s neither stimulative nor restrictive for the economy.
