Fed Signals Slower Rate Cuts as Inflation Stays Above Target

Americans hoping for lower borrowing costs may face disappointment as the Federal Reserve signals a slower pace of rate cuts.

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Policymakers are expected to reduce the benchmark interest rate by a quarter-point to 4.3 percent when their meeting concludes on Wednesday.

While this marks the third consecutive cut, it reflects a cautious approach, as inflation remains above the Fed’s two percent target.

The rate reached a four-decade high of 5.3 percent in July 2023. The policymakers had kept their key rate at its peak for more than a year to try to quell inflation, until slashing the rate by a half-point in September and a quarter-point last month.

However, inflation, despite dropping from its 9.1 percent peak in mid-2022, has not declined as anticipated.

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David Wilcox, a former senior Fed official, noted, “We’re on the cusp of a transition to them not cutting every meeting. They’re going to slow the tempo of cuts.”

How Persistent Is Inflation?

While inflation pressures have eased, core inflation, excluding food and energy, has hovered at 2.8 percent since March.

This figure exceeds policymakers’ forecasts from a year ago, when they projected it would fall to 2.4 percent.

Fed Chair Jerome Powell acknowledged the challenges, stating, “Growth is definitely stronger than we thought, and inflation is coming in a little higher. So the good news is, we can afford to be a little more cautious.”

The Fed’s goal is to achieve a “neutral” interest rate—one that neither spurs nor restricts economic growth. Economists estimate this level to be between three percent and 3.5 percent, though opinions among policymakers vary. Persistent inflation may require maintaining rates above this neutral level, according to Richard Clarida, a former vice chair of the Fed.

What Role Does the Economy Play?

The U.S. economy has shown resilience, growing at an annual rate of 2.8 percent during the July-September quarter.

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November retail sales, set to be reported Tuesday, are expected to indicate healthy consumer demand. Despite the positive indicators, some economists question the need for further cuts.

David Beckworth of the Mercatus Center argued, “There doesn’t seem to be any sign of weakness emerging overall. I don’t see in my mind the justification for rate cuts.”

How Could Politics Influence Fed Policy?

The incoming administration of President-elect Donald Trump introduces additional uncertainty. Proposed policies, including import taxes and deportations, could heighten inflation risks.

Tara Sinclair of George Washington University suggested that these uncertainties might prompt the Fed to adopt a more gradual approach to rate reductions.

Fed officials are also set to release updated projections for economic growth, inflation, and unemployment. In September, they anticipated four rate cuts in 2025. However, recent developments suggest only two or three cuts are likely. Powell emphasized that any reductions now are akin to easing off the brake rather than accelerating economic activity.

This article contains reporting from The Associated Press