The Federal Reserve cuts its key interest rate by a quarter point

WASHINGTON (AP) – The Federal Reserve cut its key interest rate by a quarter point Thursday in response to the steady decline in once-high inflation that had angered Americans and helped propel Donald Trump’s presidential victory this week.

The rate cut follows a major half-point cut in September, and it reflects the Fed’s renewed focus on supporting the labor market and fighting inflation, which now barely exceeds the central bank’s 2% target.

Asked at a news conference how Trump’s election might affect the Fed’s policymaking, Chairman Jerome Powell said that “in the short term, the election will have no impact on our (rate) decisions.”

But Trump’s election, beyond its economic consequences, has raised the specter of interference of the White House in the Fed’s policy decisions. Trump has argued that as president he should have a voice in the central bank’s interest rate decisions. The Fed has long guarded its role as an independent agency capable of making difficult decisions about lending rates, free from political interference. Still, in his previous tenure in the White House, Trump publicly attacked Powell after the Fed raised interest rates to fight inflation, and he may do so again.

Asked whether he would step down if Trump asked him to, Powell, who will have a year left in his second four-year term as Fed chairman when Trump takes office, simply said, “No.”

And Powell said that, in his view, Trump could not fire or demote him: That would “not be allowed under the law,” he said.

Thursday’s Fed rate cut lowered its benchmark rate to around 4.6%, down from a four-decade high of 5.3%. The Fed had kept interest rates this high for more than a year to combat the worst inflation streak in four decades. Annual inflation has since fallen from a peak of 9.1% in mid-2022 to a 3 1/2-year low of 2.4% in September.

As its latest policy meeting ended on Thursday, the Fed issued a statement noting that “unemployment has risen but remains low” and while inflation has fallen closer to the 2% target level, “it remains somewhat elevated.”

After their rate cut in September – their first move in more than four years – policymakers had forecast further quarter-point cuts in November and December and four more next year. But with the economy now mostly solid and Wall Street expecting faster growth, bigger budget deficits and higher inflation under a Trump presidency, further rate cuts may have become less likely. The Fed’s interest rate cuts typically lead over time to lower borrowing costs for consumers and businesses.

Powell declined to be drawn Thursday on whether the Fed would pursue another quarter-point rate cut in December or the four rate cuts its policymakers had targeted for 2025.

Diane Swonk, chief economist at accounting giant KPMG, said she believed Powell was reluctant to give hints about the Fed’s next move because of the uncertainty caused by Trump’s election victory.

“He’s not willing to get too far ahead of his skis, given how much can change,” she said. “In an environment where you don’t know how promises on the campaign trail translate into actual policies, you don’t want to lead the way.”

Still, Matthew Luzzetti, an economist at Deutsche Bank, said there were signs the Fed could end up announcing fewer rate cuts next year than many economists expect. The labor market and economy are looking healthier than they did in September, when the Fed announced an extraordinary half-point rate cut.

“Nothing in the economic data,” Luzzetti said, “suggests that (the Fed) has any need to rush” to bring rates down significantly.”

On Thursday, Powell expressed confidence that despite some recent higher-than-expected readings, inflation would continue to fall back to the Fed’s target.

“We feel the story is very consistent with inflation continuing to fall on a bumpy path over the next few years, falling around 2%,” he said.

The economy clouds the picture by flashing conflicting signals, with solid growth but employment impairment. However, consumer spending has been healthy, raising concerns that there is no need for the Fed to cut borrowing costs and that it could overstimulate the economy and even accelerate inflation again.

Financial markets throw another curve at the Fed: Investors have pushed up government yields since the central bank cut interest rates in September. The result has been higher borrowing costs across the economy, reducing the benefit to consumers of the Fed’s half-point cut in its benchmark interest rate, which it announced after the September meeting.

Broader interest rates have risen as investors expect higher inflation, larger federal budget deficits and faster economic growth under President-elect Trump. Trump’s plan to impose at least 10% tariffs on all imports, as well as significantly higher taxes on Chinese goods, and to carry out a mass deportation of undocumented immigrants would almost certainly boost inflation. This would make it less likely that the Fed would continue to lower its key interest rate. Annual inflation measured by the central bank’s preferred gauge fell to 2.1% in September.

Economists at Goldman Sachs estimate that Trump’s proposed 10% tariffs, as well as his proposed taxes on Chinese imports and cars from Mexico, could send inflation back to around 2.75% to 3% by mid-2026.

The economy grew at a solid annual rate of just under 3% over the past six months, while consumer spending — driven by customers with higher incomes — rose sharply in the July-September quarter.

But companies have scaled back hiring as many people out of work struggle to find jobs. Powell has suggested that the Fed lower its key interest rate in part to strengthen the labor market. However, if economic growth continues at a healthy clip and inflation rises again, the central bank will come under pressure to slow or stop its rate cuts.

Asked at his news conference about Americans not feeling much relief from the pain of high prices that helped fuel Trump’s victory, Powell said:

“It takes a few years of real wage increases before people feel better, and that’s what we’re trying to create, and I think we’re well on our way to creating that. Inflation has come down a long way, the economy is still strong here, wages are moving up, but at a sustainable level.

“I think what needs to happen is happening and for the most part has happened, but it will take some time for people to regain their confidence and feel it.”

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AP Business Writer Alex Veiga contributed to this report from Los Angeles.