WASHINGTON — Americans are hoping for lower borrowing costs housescredit cards and autos may be disappointed after this week’s Federal Reserve meeting. Fed policymakers are likely to signal fewer interest rate cuts next year than previously expected.
The officials will cut their benchmark interest rate, which affects many consumer and business loans, by a quarter of a percentage point to about 4.3% when their meeting ends Wednesday. At that level, interest rates would be a full point below the four-decade high they reached in July 2023. Policymakers had kept their policy rates at their peak for over a year in an attempt to curb inflation, until they cut rates by a quarter. half point in September and a quarter of a point last month.
The problem is that while inflation has fallen well below its peak of 9.1% in mid-2022, it remains stubbornly above the Fed’s 2% target. As a result, the Fed, led by Chairman Jerome Powell, is expected to signal a shift on Wednesday to a more gradual approach to rate cuts through 2025. Economists say that after three straight rate cuts, the central bank is likely to do so at every other meeting, or possibly even less often than that.
“We are on the cusp of a transition that doesn’t involve canceling every meeting,” said David Wilcox, a former senior Fed official and economist at Bloomberg Economics and the Peterson Institute for International Economics. “They are going to slow down the pace of cuts.”
The economy has did better than officials expected only in September. And inflationary pressures have proven more persistent. The presidential election also added a wildcard: President-elect Donald Trump has promised to pursue policies — from much higher taxes on imports to mass deportations of people living in the United States illegally — that most economists say will drive inflation threaten to accelerate.
“Growth is definitely stronger than we thought, and inflation is coming in a little higher,” Powell said said recently. “So the good news is that we can afford to be a little more cautious” as Fed officials try to cut rates to what they consider a “neutral” level — one that neither stimulates nor constrains growth .
On Wednesday, policymakers will also release their quarterly forecasts for growth, inflation, unemployment and their benchmark interest rate for the next three years. In September they had jointly committed to cutting interest rates four times next year. Economists now expect only two or three Fed rate cuts in 2025. Wall Street traders foresee even fewer: just two cuts, according to futures prices.
Fewer Fed rate cuts would mean households and businesses would continue to face interest rates, especially on home mortgages, that would be much higher than levels before inflation started rising more than three years ago.
Some economists are wondering whether the Fed should make cuts at all this week. Inflation, excluding volatile food and energy costs, has been stuck at an annual rate of around 2.8% since March. A year ago, policymakers had predicted that this figure would have fallen to 2.4% and that they would have cut their policy interest rate by three-quarters of a point. Instead, inflation has been stuck at higher levels while the Fed has cut rates by a full point.
Fed officials, including Powell, have said they still expect inflation to fall, however slowly, while their policy rate is still high enough to limit growth. As a result, cutting rates this week looks more like letting off the brake than the accelerator.
The potential for major changes in tax, spending and immigration policies under Trump is another reason for the Fed to move more cautiously. Former Fed economists say central bank staff likely started including the effects of Trump’s proposed corporate tax cuts in their economic analyses, but not his proposed tariffs or deportations, because these two policies are too difficult to estimate without details are.
Tara Sinclair, an economist at George Washington University and a former Treasury Department official, suggested that uncertainty over whether Trump’s policy changes will keep inflation high — and necessitate higher interest rates — could also mean the Fed would cut rates more gradually, if at all. .
“It seems easier to explain that they are not cutting spending than that they are in a position where they would have to raise rates in this political environment,” Sinclair said.
Powell has said the Fed wants to cut interest rates to the so-called “neutral” level. Yet there is great disagreement among policymakers about how high that percentage is. Many economists estimate this at 3% to 3.5%. Some economists think this could be even higher.
And Richard Clarida, a former Fed vice chairman and director at PIMCO, said that if inflation remains stuck above the Fed’s target level, policymakers are likely to keep rates above the neutral level.
During the July-September quarter, the economy grew at a solid annual rate of 2.8%. On Tuesday, the government will release November retail sales figures, which are expected to show healthy consumer demand.
“Overall, there doesn’t appear to be any sign of weakness,” said David Beckworth, a senior fellow at George Mason University’s Mercatus Center. “In my view, I see no justification for interest rate cuts.”