The Federal Reserve is expected to announce a quarter-point cut to its benchmark rate, reducing it from about 4.6% to roughly 4.3%. This move follows a half-point rate cut in September and a quarter-point reduction in November. However, the Fed's upcoming meeting may signal a shift in its policies, with a slower pace of interest rate cuts anticipated for next year.
Instead of a rate cut at each meeting, the Fed is likely to cut rates at every other meeting, at most. Policymakers may indicate that they expect to reduce the key rate only two or three times in 2025, compared to the four rate cuts previously envisioned.
The Fed has justified its recent rate cuts as a 'recalibration' of ultra-high rates that were initially intended to combat high inflation, which peaked at 7.2% in June 2022 but has since decreased to 2.3% in October. Despite lower inflation levels, the economy continues to grow steadily, with Americans showing a willingness to spend, particularly those with higher incomes.
However, concerns remain that further rate cuts could potentially lead to excessive economic stimulus and keep inflation elevated. President-elect Donald Trump's proposed tax cuts and regulatory changes could further impact economic growth and inflation, adding to the uncertainty surrounding the economy.
As the Fed nears a 'neutral' benchmark rate that neither stimulates nor hinders the economy, officials are proceeding cautiously with rate reductions. The average 30-year mortgage rate currently stands at 6.6%, lower than the peak of 7.8% in October 2023 but still far from the pre-pandemic rate of around 3%.
Chair Jerome Powell emphasized the need for caution in light of stronger-than-expected growth and slightly higher inflation levels. Meanwhile, central banks worldwide, including the European Central Bank, are also cutting their benchmark rates in response to changing economic conditions.
