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In response to the steady drop in the once-high inflation that infuriated Americans and contributed to Donald Trump’s victory in this week’s presidential election, the Federal Reserve lowered its key interest rate by a quarter-point on Thursday.
The rate cut, which comes after a more significant half-point cut in September, reflects the Fed’s renewed emphasis on bolstering the labour market and combating inflation, which is currently just above the central bank’s 2% target.
Thursday’s move reduces the Fed’s benchmark rate to about 4.6%, down from a four-decade high of 5.3% before September’s meeting. To combat the worst inflation run in forty years, the Fed had maintained that rate at that level for over a year. 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.
Speaking at a press conference, Chair Jerome Powell responded that “in the near term, the election will have no effects on our (interest rate) decisions.” Powell was asked how Trump’s election might impact the Fed’s policymaking.
But Trump’s election, beyond its economic consequences, has raised the spectre of meddling by the White House in the Fed’s policy decisions. Trump has declared that he should be able to influence the central bank’s interest rate decisions in his capacity as president. The Fed has long defended its position as an impartial organisation free from political influence that can make tough choices regarding borrowing rates. However, Trump may publicly criticise Powell again, as he did during his previous term in the White House, following the Fed’s rate hike to combat inflation.
Powell will have one year remaining in his second four-year term as Fed chair when Trump takes office, and when asked if he would step down if Trump asked him to, Powell said simply, “No.”
He added that he did not believe Trump could demote or fire him because it would “not be permitted under the law,” according to Powell.
The Fed stated in a statement following the conclusion of its most recent meeting that although inflation has gotten closer to the 2% target level, it “remains somewhat elevated” and that the “unemployment rate has moved up but remains low.”
The Fed’s policymakers had predicted that they would cut interest rates by another quarter point in November and December, as well as four more next year, following their rate cut in September, which was their first in over four years. Further rate cuts may have become less likely, however, as the economy is now largely stable and Wall Street expects faster growth, larger budget deficits, and higher inflation under a Trump presidency.
Powell stated that the Fed plans to gradually lower its key rate in the direction of what it refers to as “neutral”—a level that neither impedes nor promotes growth. He has admitted, along with other officials, that they are unsure of the precise location of the neutral rate.
“We’re on a path to a more neutral stance,” the Fed chair said. “That has not changed at all. We simply need to find out where the data is.
The economy is clouding the picture by flashing conflicting signals, with growth solid but hiring weakening. However, consumer spending has been robust, which has fuelled worries that the Fed does not need to lower borrowing costs and that doing so could overstimulate the economy and even accelerate inflation again.
Since the Fed lowered interest rates in September, investors have sharply increased Treasury yields, causing financial markets to throw the central bank another curve. The Fed’s half-point cut in its benchmark rate, which it announced following its September meeting, has resulted in higher borrowing costs across the economy, reducing the benefit to consumers.
Due to investors’ expectations of increased inflation, bigger federal budget deficits, and faster economic growth under President Trump, broader interest rates have increased. 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. The Fed would be less likely to keep lowering its key rate as a result. 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.
Rate cuts by the Fed typically lead to lower borrowing costs for consumers and businesses over time. This time, though, mortgage rates dropped in expectation of rate reductions, but they have since increased again due to the robust expansion of the economy, which has been driven by consumer spending. Despite the Fed’s efforts to support the economy by lowering borrowing costs, the central bank may face a problem if investors act to raise longer-term borrowing rates. This is because high borrowing costs for mortgages, auto loans, and other large purchases have created a potential problem for the Fed.
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.
However, businesses have reduced hiring, and many unemployed people are having difficulty finding new employment. According to Powell, the Fed is lowering its key rate in part to support the labour market. If economic growth continues at a healthy clip and inflation climbs again, though, the central bank will come under growing pressure to slow or stop its rate cuts.