Fed lowers key interest rate by quarter point as inflation eases but pace of cuts may slow
Paul Davidson, Daniel de Visé and Medora Lee, USA TODAY
Updated 6 min read
WASHINGTON — The Federal Reserve lowered its key interest rate by a quarter percentage point Thursday, its second straight rate cut amid easing inflation and a move set to further trim borrowing costs for millions of Americans.
But the more modest cut likely foreshadows a slower pace of rate decreases that economic forecasters say was solidified by Republican Donald Trump’s victory in Tuesday’s presidential election. Trump’s tax, trade and immigration policies are expected by forecasters to partly reignite inflation, which has pulled back substantially since 2022.
In a statement after a two-day meeting, the Fed steered clear of any references to Trump or the election.
"In the near term, the election will have no effect on our policy decisions," Fed Chair Jerome Powell said at a news conference. "We don't know what the timing and substance of any policy changes will be."
What is the Fed interest rate now
Thursday’s widely expected decision leaves the Fed’s benchmark short-term rate at a range of 4.5% to 4.75%, down from a 23-year high of 5.25% to 5.5% just a couple of months ago. The move is poised to further push down rates for credit cards, some mortgages and auto and other loans while also trimming bank saving account yields that had finally gotten more generous after years of paltry returns.
The Fed lifts rates to tamp down borrowing activity and inflation. It lowers rates to spark a softening job market and economy.
In September, the Fed slashed its key rate by a hefty half percentage point, its first rate cut in four years, in a bold move aimed at bolstering the economy following weak job gains over the summer.
Fed policymakers also were looking to start bringing rates back to normal now that their preferred annual inflation measure has tumbled from 5.6% in early 2022 to 2.7% in September. In 2022 and 2023, the central bank hoisted its key rate from near zero to tame a pandemic-related inflation spike.
"Even with today's cut our policy is still restrictive," Powell said.
But officials forecast just 1.5 percentage points in additional rate decreases through next year, an estimate that economists said equates to quarter point drops this week, in December and at half the Fed’s eight meetings in 2025.
How’s the economy right now?
Since then, economic reports have sent mixed signals. Employers added just 12,000 jobs in October, far fewer than the 105,000 expected even after factoring in two Southeast hurricanes and a Boeing workers’ strike.
Some forecasters said the poor showing reflected underlying weakness in the labor market and could prompt the Fed to weigh another half point rate reduction in December.
But others said it’s difficult for the Fed to filter out the effects of the storms and strike and it likely would write off the dismal report.
The unemployment rate, which is less impacted by weather and strikes, held steady at a historically low 4.1%, suggesting it likely would end the year below the 4.4% the Fed projected in September.
And consumer spending and economic growth were strong in the third quarter.
"This is a strong economy," Powell said. "It's actually remarkable how well the economy has performed."
Meanwhile, the Fed’s preferred inflation measure – which excludes volatile food and energy items -remained stuck at 2.7% for a third straight month in September, indicating it likely would end the year above the Fed’s 2.6% forecast, Barclays said.
How much is the Fed expected to cut interest rates?
The lower-than-expected jobless rate and higher inflation could lead the Fed to cut its rate less sharply, leaving it at 3.5% to 3.75% by the end of 2025 instead of the 3.25% to 3.5% Fed officials predicted, Barclays said. And while most economists expect another rate drop in December, the research firm said there’s some risk the Fed could pause.
Powell wouldn’t discuss the odds of a pause next month but said, “It may be appropriate to slow the pace at which we dial back restriction,” meaning policy restraints. He didn’t link such a move to Trump’s plans.
Economists, though, say Trump’s win this week may mean even fewer rate cuts. His proposed tariffs could boost prices on a range of consumer products and leave the Fed’s preferred inflation reading averaging 3.1% next year, up from an estimated 2.3%, Nomura, a research firm, said.
Trump’s plan to extend his 2017 tax cuts, which are set to expire in 2025, is likely to be approved by what could be a Republican Congress, further juicing the economy and inflation.
And his vow to more severely restrict immigration at the southern border and deport millions of migrants who lack permanent legal status could constrain labor force growth and push wages and inflation higher. The past couple of years, an immigration surge expanded the labor supply and helped abate inflation pressures.
As a result, futures markets expect the Fed to reduce its federal funds rate even less - to 3.75% to 4% by the end of next year, a half point higher than officials estimated.
But economist Samuel Tombs of Pantheon Macroeconomics reckons higher tariffs also will hamper consumer spending while reduced immigration will dampen both consumption and hiring.
A weaker overall economy eventually could lead the Fed to lower rates further, he said in a research note.
During his first term, Trump repeatedly badgered Powell and the Fed for hiking interest rates or not cutting them. This year, Trump has said the president should have a voice in Fed rate decisions, a shift that would compromise the central bank’s traditional independence from political forces.
Asked if he would resign from the Fed's board if asked by the new administration, Powell said flatly, "No."
When is the next Fed meeting in 2024?
The Federal Reserve has one more opportunity to consider interest rate moves in 2024.
Inflation is falling, but not as quickly as forecasters had estimated. The Fed’s preferred annual inflation measure dipped to 2.1% last month, just above the central bank's 2% goal. But a core inflation gauge that excludes volatile food and energy items – which the Fed watches more closely – held firm at 2.7% and will likely end the year above the 2.6% forecast by Fed officials.
The cost of services such health care and car repairs continued to climb, in part because of sharp employee pay increases that companies pass along to consumers.
The upshot: The Fed may still need to worry more about an inflation resurgence than a sputtering job market. "It's not guaranteed that inflation comes down to 2%," said Barclays economist Marc Giannoni.
Barclays estimates core inflation will end 2025 at 2.3%, still above the Fed’s 2% target.
(This story was updated to add new information and to add a photo or video.)
