The rate cut may be small, but the Fed chairman is going to make it big
Please put your seats back up, because the American economy is preparing for a crash. At least that’s how Fed Chairman Jerome Powell described the possible slowdown in the pace of rate cuts.
Powell made the comments during a news conference following the Federal Open Market Committee’s decision lower interest rates by a quarter of a percent. While the federal funds rate is still high, with a target range of 4.5% to 4.75%, Powell said the committee is willing to adjust the rate at which it is lowered.
“We’re reaching a point where we’re slowing down, just like a plane coming into the airport slows down,” he said. “If the economy remains strong and inflation does not move sustainably towards 2%, we can scale back policy more slowly.”
His comments came in response to a barrage of questions about how the outcome of the election could change the economy and the Fed’s decisions.
The Fed had originally planned multiple rate cuts through 2025, with some committee members indicating rates could fall to 3% to 3.25% by the end of next year. That could change if President-elect Donald Trump and the Republican Party’s promised tax cuts and tariffs reignite inflation, as some experts predict.
Despite numerous questions about the impact of the election on the Fed, Powell declined to make predictions.
“In the short term, the elections will have no impact on our policy decisions,” he said. “We don’t guess, we don’t speculate and we don’t assume.”
When asked if he would resign given Trump’s previous threats to fire him, Powell responded in one word: “No.”
The central bank caused a furore in September when it cut interest rates by half a percent, the biggest cut since 2008. That decision came after a three-year battle against soaring inflation, which peaked at 9.1% in 2022. As inflation approached Powell said the committee shifted its focus to bolstering a softening labor market by cutting interest rates.
An interest rate cut of 0.25% in itself will not make much difference. But combined with September’s rate cut and possibly more rate cuts in the future, rates could finally drop enough to make borrowing more affordable. Experts say it’s best to focus on creating your own solid financial plan, rather than reacting to every possible change on the horizon.
What happened after the interest rate cut in September?
Annual interest rates on credit cards fell slightly after the first rate cut and should fall further if the Fed continues to cut the federal funds rate. But credit card debt remains expensive, so it’s best to take steps now to pay off high-interest debt.
Meanwhile, savings rates on CDs and high-yield savings accounts have already started to fall and are likely to fall further. It’s best to lock in a higher interest rate now before another possible reduction to maximize your earnings.
Mortgage rates initially fell after the interest rate cut in September, but have since risen again. Experts expected interest rates to fall next year due to further rate cuts, but volatility in the economy could put mortgage rates on an uncertain path.
Will there be another interest rate cut in December?
Given Powell’s continued optimism about finding the balance between inflation and employment, most experts still expect a rate cut in December.
“I think it will take some surprising inflation or employment data between now and the next meeting to change that scenario,” said Jim Cagnina, an analyst at NinjaTrader, an online broker.
However, there are still many factors that could change between now and the December 17-18 meeting. Stay informed.
