The U.S. Federal Reserve’s Open Market Committee voted 11 to 1 to cut its benchmark rate by 0.25% on Wednesday, but the monetary body dialed back its outlook for next year and is now signaling there may only be two additional reductions in 2025.
That’s mostly thanks to pesky inflation that continues to hover north of the Fed’s 2% goal as the U.S. economy outperforms expectations, and the rest of the world, according Federal Reserve Chairman Jerome Powell.
“The U.S. economy is just performing very, very well, substantially better than our global peer group,” Powell said at a press conference following the conclusion of the Fed’s last policy meeting of the year on Wednesday. “The outlook is pretty bright for our economy … but we have to stay on task.”
The Fed’s two-part task, as mandated by Congress, is to maintain price stability alongside maximum unemployment. While the monetary body battled a post-pandemic inflation surge by levying 11 straight rate increases that raised its benchmark rate to 5.25% to 5.5%, the highest in 23 years, Wednesday’s cut, along with reductions in September and November have brought the Fed’s overnight intra-bank lending rate down to 4.25% to 5.5%.
But inflation that’s remained stubbornly in the mid 2% range for the last few months, and new projections that indicate an average inflation rate of 2.5% for 2025, have dampened the Fed’s previous indicators that next year could see as many as four additional rate cuts.
And, some economists believe the monetary body could be assuming a more cautious stance ahead of expected policy changes promised by President-elect Donald Trump.
“This could be the last cut for a while,” Jacob Channel, senior economist for LendingTree, told The Associated Press. “Because the upcoming Trump administration’s policies might cause a resurgence in inflation or otherwise throw the economy off balance, the Fed might choose to take a wait-and-see approach and hold rates steady at their January meeting.”
Why the Fed’s rate changes matter
Where the Federal Reserve sets its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution’s total deposits — trickles down to consumers in numerous ways.
First, mortgage rates don’t necessarily move in tandem with the Fed’s rate increases. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic, and were hovering around 2% in late 2021, the rates tracked up alongside the Fed’s series of 11 hikes to its federal funds rate.
As of Wednesday, the average rate on a 30-year fixed rate mortgage was 6.6%, according to tracking by Freddie Mac, down 0.35% from this time last year and a decrease of 0.9% from a week ago. That rate reached nearly 7.8% in October 2023, the highest since the late 1990s, but still not excessive from a historical perspective. Home mortgage rates breached the 18% mark in the early 1980s, for example.
Higher rates can also make accessing credit, like qualifying for a home mortgage or new car loan, more difficult as banks tighten lending policy to reflect economic conditions. A poll conducted in March by Bankrate found half of U.S. applicants have been denied a loan or financial product since the Fed began raising interest rates two years ago. Americans with credit scores below 670 have been finding it tough to access credit.
Rates on loans for cars and trucks, currently ranging from 5% to 15% depending on applicant’s credit score and among the highest since the early 2000s, should see some easing thanks to the Fed cut. As recently as three years ago, average rates on vehicle loans were coming in below 5%.
Credit card rates are set by issuing institutions based on a number of factors, including the card applicant’s personal credit history, but base rates are computed in part using the prime lending rate which is tied to the Fed’s benchmark rates. According to the Consumer Financial Protection Bureau, over the last 10 years, average (annual percentage rates) on credit cards assessed interest have almost doubled from 12.9%in late 2013 to 22.8% in 2023 — the highest level recorded since the Federal Reserve began collecting that data in 1994.