The US Federal Reserve is likely to cut interest rates

WASHINGTON (AP) – Federal Reserve officials on Wednesday are likely to signal a slower pace of rate cuts next year than in the past few months, which would mean Americans may enjoy little relief from still high borrowing costs for mortgages, auto loans and credit cards .

The Fed is set to announce a quarter point cut in its benchmark interest rate from around 4.6% to around 4.3%. The latest move would follow a larger-than-usual half-point rate cut in September and a quarter-point cut in November.

However, Wednesday’s meeting could mark a shift to a new phase in the Fed’s policy: Instead of an interest rate cut at every meeting, it is more likely that the Fed will lower at every other meeting – at most. Central bank policymakers may signal that they expect to cut their key interest rate just two or three times in 2025, instead of the four rate cuts they envisioned three months ago.

So far, the Fed has explained its moves by describing them as a “recalibration” of the ultra-high interest rates that were meant 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 rates need not be that high.

But inflation has remained firmly above the Fed’s 2% target in recent months, while the economy has continued to grow strongly. On Tuesday, the government’s monthly retail sales report showed that Americans, especially those with higher incomes, are still willing to spend freely. For some analysts, these trends increase the risk that further interest rate cuts could provide too much of a boost to the economy and thus keep inflation high.

On top of that, President-elect Donald Trump has proposed a series of tax cuts — on Social Security benefits, tip income and overtime income — as well as a cut in regulations. Overall, these measures 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.

Chairman Jerome Powell and other Fed officials have said they will not be able to assess how Trump’s policies might affect the economy or their own interest rate decisions until more details are made available and it becomes clearer how likely it is that the president-elect’s proposal will actually be passed. Until then, the outcome of the presidential election has mostly increased the uncertainty surrounding the economy.

Either way, it seems 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 are will not be returning in the foreseeable future.

Fed officials have emphasized that they are slowing their rate cuts as their benchmark interest rate approaches 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 bit higher,” Powell said recently. “So the good news is that we can afford to be a little more careful when trying to find neutrals.”

Most other central banks around the world are also lowering their benchmark interest rates. Last week, the European Central Bank lowered its policy rate for the fourth time this year to 3% from 3.25% as inflation in the 20 countries that use the euro has fallen to 2.3% from a peak of 10.6% at the end of 2022.