Fed Cuts Interest Rates Again—But Uncertainty Swirls As Trump Policies Could Fuel Inflation

Topline

The Federal Reserve lowered the federal funds rate for a second consecutive time Thursday, but the economic policies floated by President-elect Donald Trump have some economists questioning the path of interest rates heading into next year.

Key Facts

At the conclusion of the policy-setting Federal Open Market Committee’s two-day meeting, the central bank announced it cut the federal funds rate by 25 basis points to 4.5% to 4.75%, the lowest level since March 2023.

The announcement comes on the heels of the central bank’s September summit, in which the Fed announced the first rate cut since March 2020, rolling out a supersized 50 basis-point move.

Economists and investors alike heavily anticipated the 0.25 percentage-point cut Thursday, as the CME Group’s FedWatch Tool, which tracks derivatives contracts betting on the federal funds rate, priced in a 99% chance of that magnitude of a cut.

Powell Says He Won’t Resign

In a press conference following the rate cut release, Fed Chairman Jerome Powell curtly answered “no” when asked if he’d resign if Trump asked him to, adding it’s “not permitted under the law" for the president to oust him or other governors of the central bank. Powell and Trump share a fraught history since Trump tapped Powell to the top central banker role in 2017, as Trump labeled Powell an enemy in 2019 over a rate cut disagreement and said in August he believes the “president should have at least say” on interest rates, an assertion which would break precedent for the independently run Fed. CNN reported Thursday Trump intends to let Powell finish his term atop the Fed ending in 2026, citing an anonymous adviser to the president-elect.

How Will Trump Impact The Fed?

Though this week’s move from the Fed didn’t bring much drama, economists at major banks noted following this week’s election there’s added variability moving forward, potentially jeopardizing the pace and magnitude of further rate cuts. “The various policy uncertainties may lead the Fed to move more slowly than it otherwise would,” wrote JPMorgan Chase’s chief U.S. economist Michael Feroli in a Wednesday note to clients, predicting one rate cut per quarter until reaching 3.5%. Bank of America’s senior U.S. economist cautions Trump’s aggressive tariff proposals “could derail the Fed cutting cycle” and the Fed will decline to further lower rates if major import taxes are announced, noting the Fed “will err on the side of caution” in evaluating the inflationary effects of tariffs. And Deutsche Bank chief U.S. economist Matthew Luzzetti notes it’s a “hawkish” outlook for the Fed heading into 2025, nodding to the potential for “stickier” inflation due to tariffs.

Big Number

4% to 4.5%. That’s where Luzzetti projects the Fed-determined interest rate will end next year, close to a full percentage point higher than the 3.4% median forecast shared by Fed staff in September.

Key Background

It’s been a whirlwind four years for monetary policy. The Fed slashed rates to near zero in March 2020 in response to the sudden economic shocks COVID-19 lockdowns. It then hiked rates in 2022 and 2023 to a two-decade high of over 5% in response to surging inflation, moving in the second half of this year toward cuts as inflation moderated. The central bank sets the target federal funds rate, which only officially determines the borrowing costs in overnight transactions between financial institutions, but heavily influences lending rates across the country. That means lower interest rates typically help stimulate the economy as consumer and corporate borrowers are more likely to take on less expensive debt. But the Fed’s September rate cut didn’t have the desired effect, as government bond yields, which serve as a proxy for market expectations for Fed policy, have actually moved up sharply. This week’s upward yield move appears tied to inflation concerns stemming from Trump’s proposed tariffs, which economists largely agree would increase consumer prices, but it’s also a reflection of increased belief in the strength of the broader American economy, as better economic conditions make the need for stimulatory rate cuts less pressing.

Surprising Fact

Mortgage rates climbed this week to their highest level in three months, with the 30-year average mortgage rate hitting 6.79%, according to federal government-backed lender Freddie Mac. That’s about 70 basis points higher than mortgage rates were in the week following the September rate cut, a reflection of the increase in 10-year U.S. Treasury yields.

Crucial Quote

“The Fed is going to be even more important in 2025 than it is today, if you could possibly imagine that,” declared Siebert chief investment officer Mark Malek in emailed comments.

Further Reading