Fed slows rate cuts as inflation persists

It was a big disappointment for investors, but also unwelcome news for borrowers and prospective homebuyers waiting for lower interest costs.

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“Today was a closer call but we decided it was the right call,” Fed chair Jerome Powell said at a news conference after the central bank approved a quarter-point cut in its main lending rate, bringing the total decline since September to a full percentage point. “From here, it’s a new phase, and we’re going to be cautious about further cuts.”

Bah, humbug: We’ve barely had an opportunity to benefit from lower rates, yet the Fed is, as the old saying goes, taking away the punchbowl as inflation lingers like an unwanted party guest.

Why it matters: True, auto loans have gotten cheaper. That’s because they move in conjunction with the Fed’s short-term rates, which have declined to about 4.3 percent since September.

But the real pain point, mortgage costs, have climbed. The rate on a 30-year fixed loan topped 7 percent on Wednesday, the highest since July, according to Mortgage News Daily.

Why? Home loans are tied to longer-term rates, which have risen on stronger-than-expected economic growth, inflation concerns, and a widening federal debt. The housing market has barely thawed.

Xem thêm : Fewer Interest Rate Cuts Likely In 2025 Due To Continued Inflation

Meanwhile, savers have watched as returns on CDs, money market mutual funds, and high-yield savings accounts followed the Fed’s benchmark rate lower.

The reaction: The stock market, which is having a great year, tumbled following the Fed’s announcement. US government bonds fell, sending the yield on the all-important 10-year Treasury to its highest point since May.

Futures on the Standard & Poor’s 500 index rose about 0.5 percent on Thursday morning, after the benchmark index lost nearly 3 percent the day before.

“The market is going to have to come to grips with a potentially less accommodative Fed,” said Eric Merlis, co-head of global markets at Citizens Bank in Boston.

What’s next: The Fed’s warning on rates has clouded an already murky picture.

In new projections, Fed policy makers said that they expect to reduce rates twice next year, down from the four cuts they estimated in September. That was a bigger shift than investors had expected.

Based on futures prices, investors see just a 6 percent chance of a Fed rate cut when it meets on Jan. 28-29, down from 90 percent a month ago.

Behind the change: Optimism abounded when the Fed began trimming rates, which marked the Fed’s shift from a laser focus on inflation to protecting the job market. Now, the central bank is back to worrying about prices.

Inflation has fallen to about 2.8 percent this year from a peak of 5.6 percent in February 2022, as measured by the core Personal Consumption Expenditures index, which excludes food and energy. But the gauge has been moving sideways in recent months.

Xem thêm : UK inflation, November 2024

Officials boosted their 2025 forecast for core inflation to 2.5 percent from their previous forecast of 2.2 percent.

The Fed is determined to get inflation back to its 2 percent target. With the job market cooling but still in solid shape, Powell said policy makers could afford to take a wait-and-see attitude on further rate reductions.

But: Powell and his colleagues are “caught between several rocks and several hard places,” Brian Bethune, a Boston College economist, said in an email. According to Bethune:

• President-elect Donald Trump’s proposed tariff increases on Mexico and Canada, combined with immigration restrictions, would drive up inflation.
• They could also trigger retaliation from those key trading partners and potentially cause a recession.
• The US dollar is appreciating as the US economy outpaces the world, a threat to exports and growth.

Powell acknowledged that some of his colleagues have begun to factor in the uncertainty created by Trump’s agenda, which also includes cutting taxes and business regulations.

“It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down,” he said.

Final thought: The Fed remains on course for a soft landing — returning to 2 percent inflation without a recession — but it will take longer than it previously thought.

Policy makers’ projections have core PCE reaching the target in 2027, not 2026 as previously estimated. It could be a long wait for significantly lower rates.

Feels like we got a lump of coal.

Larry Edelman can be reached at [email protected].