The U.S. Federal Reserve is poised Thursday to reduce its key interest rate for a second straight time, responding to a steady slowdown of the inflation pressures,
A sustained reduction in inflation pressures that frustrated many Americans and helped Donald Trump win the presidency has prompted the Federal Reserve to prepare to lower its benchmark interest rate for the second consecutive time on Thursday.
However, since Trump’s economic plans have been heavily criticized for possibly inflating inflation, the Fed’s future actions are now less certain. Trump’s declaration that, as president, he should have a say in the central bank’s interest rate decisions has also increased the possibility that the White House will interfere with the Fed’s policy decisions.
The Fed has long defended its standing as an impartial organization immune from political influence that can make tough choices regarding borrowing rates. However, Trump may openly criticize Chair Jerome Powell again, as he did during his previous tenure in the White House, following the Fed’s rate hike to combat inflation.
Additionally, the economy’s contradictory signals—strong growth but declining hiring—are distorting the picture. Despite this, consumer spending has been strong, which has fueled worries that the Fed doesn’t need to lower borrowing costs and that doing so could overstimulate the economy and even speed up inflation again.
Since the Fed lowered interest rates in September, investors have significantly increased Treasury yields, causing financial markets to throw the central bank another curve. The Fed’s half-point decrease in its benchmark rate, which it announced following its September meeting, has resulted in increased borrowing rates across the economy, lessening the benefit to consumers.
For instance, as the Fed suggested that it would lower rates during the summer, the average 30-year mortgage rate in the United States decreased. However, once the central bank actually lowered its benchmark rate, the rate rose once more.
Investors are expecting higher inflation, greater government budget deficits, and quicker economic growth under President-elect Trump, which has caused an increase in broader interest rates. Stock prices rose Wednesday as well, while the value of the dollar and bitcoin increased in what Wall Street has dubbed the “Trump trade.” Trump has touted cryptocurrencies during his campaign, and the dollar would probably gain from higher interest rates as well as the anticipated general tariff increase.
Inflation would most likely increase as a result of Trump’s plans to implement a mass deportation of undocumented immigrants, put at least a 10% tariff on all imports, and drastically raise taxes on Chinese goods. The Fed would be less inclined to keep lowering its benchmark rate as a result. In September, the central bank’s preferred indicator of annual inflation dropped to 2.1%.
According to Goldman Sachs economists, Trump’s proposed 10% tariff and taxes on Mexican automobiles and Chinese imports may raise inflation back to between 2.75 and 3 percent by the middle of 2026.
The Fed’s September signal of future rate cuts would probably be overturned by such a rise. When the policymakers lowered their benchmark rate by an oversized half-point to roughly 4.9% at that meeting, the officials stated that they expected to lower rates by two quarter-points later in the year, on Thursday and in December, and then four more times in 2025.
However, rate cuts next year are now seen by investors as being less likely. According to futures prices tracked by CME FedWatch, the expected likelihood of a rate decrease at the Fed’s meeting in January of next year dropped to just 28% on Wednesday, from 41% on Tuesday and from almost 70% a month earlier.
Even though the Fed is lowering its benchmark rate, the increase in borrowing costs for things like mortgages and auto loans has created a potential problem for the central bank: If investors are acting to raise longer-term borrowing rates, the Fed’s attempt to support the economy by lowering borrowing costs may not be successful.
While consumer expenditure, driven by higher-income consumers, increased significantly in the July–September quarter, the economy grew at a healthy annual rate of just under 3% during the previous six months.
At the same time, businesses have reduced hiring, making it difficult for many unemployed people to obtain employment. According to Powell, the Fed is lowering its benchmark rate in part to support the labor market. However, the central bank will face increasing pressure to halt or reduce interest rate decreases if inflation rises once again and economic growth keeps up its current pace.