The Federal Reserve cut its key interest rate by a quarter-point on Wednesday, marking its third cut this year. However, the central bank’s policymakers now expect to reduce rates more slowly next year than previously envisioned due to still-elevated inflation.
According to the Fed’s projections, policymakers anticipate just two rate cuts in 2025, down from their previous estimate of four. This suggests that consumers may not enjoy much lower rates for mortgages, auto loans, credit cards, and other forms of borrowing. The Dow Jones Industrial Average plummeted more than 1,100 points on Wednesday, while the Nasdaq composite fell about 3.5%.
Chair Jerome Powell underscored that policymakers are slowing their rate reductions as their benchmark rate nears the “neutral” level, which is thought to neither spur nor hinder the economy. The Fed’s benchmark rate stands at 4.3% after the latest rate cut.
Powell noted that the slower pace of rate cuts reflects higher inflation readings this year and expectations of continued high inflation in 2025. He also acknowledged that some policymakers are assessing the potential effects of President-elect Donald Trump’s policies on the economy and inflation, which could worsen inflation next year.
The Fed faces several challenges as it seeks to complete a “soft landing” for the economy, including sticky inflation and concerns about overheating the economy. However, Powell emphasized that the Fed does not think it needs further cooling in the labor market to achieve its 2% inflation target.
Despite elevated inflation, the Fed’s projections suggest that core inflation will decrease to 2.5% next year, which would be significant progress. The Fed chair stated that he is confident the central bank is on track to reach its 2% inflation target, potentially within a year or two from now.
Source: https://apnews.com/article/federal-reserve-inflation-loan-rates-economy-prices-7474747d890c0fdcc87454fd4c80aaa4