Americans may not see the significant drop in borrowing costs they were hoping for following this week's Federal Reserve meeting. The Fed's policymakers are expected to announce fewer interest rate cuts next year than previously anticipated. The officials are likely to reduce their benchmark rate by a quarter-point to around 4.3%, which would be a full point lower than the peak it reached in July 2023 after being held steady for over a year to combat inflation.
Despite inflation dropping from its mid-2022 high of 9.1%, it remains above the Fed's 2% target. As a result, the Fed is anticipated to adopt a more gradual approach to rate cuts in 2025, signaling a shift from the current trend of consecutive cuts. Economists suggest that rate cuts may occur at every other meeting or even less frequently.
The economy has outperformed expectations, with inflation proving to be more persistent than anticipated. The upcoming presidential election adds uncertainty, as President-elect Donald Trump's proposed policies could potentially accelerate inflation. The Fed aims to lower rates to a 'neutral' level that neither stimulates nor hinders growth.
Wednesday's meeting will also include projections for growth, inflation, unemployment, and interest rates over the next three years. While the Fed had initially projected four rate cuts for next year, economists now expect only two or three cuts in 2025. Some question the necessity of a rate cut this week, as inflation has remained steady at around 2.8% since March.
The potential impact of Trump's policy changes on inflation and the economy has led the Fed to proceed cautiously. Uncertainty surrounding the effects of tax cuts, tariffs, and immigration policies could influence the pace of rate cuts. The Fed's goal is to reach a 'neutral' rate, though there is disagreement among policymakers on the exact level.
With the economy showing resilience and consumer demand remaining strong, some experts argue against further rate cuts. The Fed's decision this week will be closely watched for its implications on borrowing costs and economic growth moving forward.
