Washington : Federal Reserve officials on Wednesday will likely signal a slower pace of interest rate cuts next year compared with the past few months, which would mean that Americans might enjoy only slight relief from still-high borrowing costs for mortgages, auto loans and credit cards.
The
Fed is set to announce a quarter-point cut to its benchmark rate, from about
4.6% to roughly 4.3%. The latest move would follow a larger-than-usual
half-point rate cut in September and a quarter-point reduction in November.
Wednesday's
meeting, though, could mark a shift to a new phase in the Fed's policies:
Instead of a rate cut at each meeting, the Fed is more likely to cut at every
other meeting at most. The central bank's policymakers may signal that they
expect to reduce their key rate just two or three times in 2025, rather than
the four rate cuts they had envisioned three months ago.
So
far, the Fed has explained its moves by describing them as a
"recalibration" of the ultra-high rates that were intended to tame
inflation, which reached a four-decade high in 2022. With inflation now much
lower at 2.3% in October, according to the Fed's preferred gauge, down from a
peak of 7.2% in June 2022 many Fed
officials argue that interest rates don't need to be so high.
But
inflation has remained stuck above the Fed's 2% target in recent months while
the economy has continued to grow briskly. On Tuesday, the government's monthly
report on retail sales showed that Americans, particularly those with higher
incomes, are still willing to spend freely. To some analysts, those trends
raise the risk that further rate cuts could deliver an excessively strong boost
to the economy and, in doing so, keep inflation elevated.
On
top of that, President-elect Donald Trump has proposed a range of tax cuts on
Social Security benefits, tipped income and overtime income as well as a
scaling-back of regulations. Collectively, these moves could stimulate growth.
At the same time, Trump has threatened to impose a variety of tariffs and to seek
mass deportations of migrants, which could accelerate inflation.
Chair
Jerome Powell and other Fed officials have said they won't be able to assess
how Trump's policies might affect the economy or their own rate decisions until
more details are made available and it becomes clearer how likely it is that
the president-elect's proposals will actually be enacted.
Either
way, it appears unlikely that Americans will enjoy much lower borrowing costs
anytime soon. The average 30-year mortgage rate was 6.6% last week, according
to mortgage giant Freddie Mac, below the peak of 7.8% reached in October 2023.
But the roughly 3% mortgage rates that existed for nearly a decade before the
pandemic aren't going to return in the foreseeable future.
Fed
officials have underscored that they are slowing their rate reductions as their
benchmark rate nears a level that policymakers refer to as "neutral"
the level that neither spurs nor hinders the economy.
"Growth
is definitely stronger than we thought, and inflation is coming in a little
higher," Powell said recently. "So the good news is, we can afford to
be a little more cautious as we try to find neutral." (AP)
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