As the nation awaits the outcome of the presidential election, the Federal Reserve is poised to make a more predictable move by cutting interest rates for the second time this year. The decision to reduce the benchmark rate is driven by the ongoing cooling of inflation, rather than the uncertainty surrounding the election results.
Chair Jerome Powell and the Fed's policymakers are expected to announce a quarter-point rate cut, bringing the benchmark rate to approximately 4.6%. This follows a half-point reduction implemented in September. Economists anticipate another quarter-point cut in December, with the possibility of further reductions in the coming year.
Unlike typical rate cuts aimed at stimulating a sluggish economy, the current reductions are part of a recalibration in response to lower inflation levels. After experiencing a four-decade high of 9.1% in June 2022, inflation has since dropped to 2.4%, just above the Fed's 2% target. This shift has led Powell and other officials to deem high borrowing rates unnecessary.
Looking ahead, the Fed is likely to continue gradual rate cuts, with the goal of reaching a neutral rate that neither restricts nor stimulates economic growth. While the exact neutral rate remains uncertain, most officials believe the current rate of 4.9% is well above this threshold.
However, some economists argue that with a healthy economy and low unemployment rates, further credit easing may not be necessary. Questions linger about the impact of potential tariffs proposed by President Trump, which could reignite inflation and prompt the Fed to reconsider its rate-cutting strategy.
Despite the political landscape and potential policy changes post-election, Powell emphasizes that the Fed's decisions remain independent of political influence. The central bank will continue to monitor economic indicators and adjust rates accordingly to maintain stability and support growth.
