Federal Reserve cuts interest rates as Trump’s 2nd term looms: NPR

Federal Reserve Chairman Jerome Powell and his colleagues cut interest rates Thursday in response to slowing inflation.

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Anna Moneymaker/Getty Images North America

The Federal Reserve cut interest rates by a quarter of a percentage point Thursday as expected — but the central bank may become more cautious about future rate cuts as it monitors the impact of economic policies in another Trump administration.

The Fed’s interest rate committee cut its benchmark interest rate to a range between 4.5% and 4.75% as policymakers react to slowing inflation and signs of a slowing labor market.

The move follows an aggressive rate cut of half a point at the Fed’s last meeting in September.

Inflation has come closer to the Fed’s target of 2 per cent. That was just above that level in September, according to the Commerce Department’s gauge, which is closely watched by the Fed.

At the same time, employment has cooled. U.S. employers added just 12,000 jobs in October — though that number was likely depressed by the Boeing strike that ended this week and the fallout from back-to-back hurricanes in the Southeast.

The Fed’s job may have gotten tougher

The Fed is trying to strike a balance between interest rates that are high enough to keep inflation in check, but not so high that they weaken the labor market.

Inflation rose in the wake of the pandemic and Russia’s invasion of Ukraine. The Fed responded by pushing interest rates to the highest level in more than two decades and holding them at that level for over a year before starting to turn them back in the fall.

On average, Fed policymakers projected in September that interest rates would end this year about a quarter of a percentage point lower than they are now, and will fall by another full point next year.

The interest-rate-cutting roadmap — drawn up before this week’s election — could hit some speed bumps if the president-elect lives up to his economic promises.

President-elect Trump speaks to supporters in West Palm Beach, Fl., Nov. 6, 2024. Economists worry that some of Trump’s proposed economic policies, including tariffs on imports, could push up prices.

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Trump has promised to cut taxes, impose sweeping tariffs and deport large numbers of immigrants living in the country illegally.

Analysts say each of these moves could put upward pressure on prices — although Trump campaigned on a promise to lower inflation — a key concern for many voters. Persistent inflation may make the Fed more cautious about cutting interest rates in the future.

While the Fed sets short-term interest rates, long-term borrowing costs are typically set by the bond market. Investors pushed up bond yields this week as they braced for the possibility that Trump’s policies could add trillions of dollars in new federal debt.

Rising bond yields pushed up mortgage costs. The average interest rate on a 30-year mortgage rose to 6.79%, according to Freddie Mac.

What will Trump do about the Fed?

Trump also poses a challenge to the Fed’s independence. The central bank, by design, is supposed to be insulated from political pressure, so it can make unpopular decisions to raise interest rates if necessary to bring inflation under control.

During his first term in the White House, Trump repeatedly flouted this convention, criticizing the Fed and the chairman he had appointed for not cutting interest rates quickly enough. Trump also criticized the Fed in September for cutting interest rates shortly before the election, which he worried could help his political rival, Vice President Kamala Harris.

Fed Chairman Jerome Powell insists that he and his colleagues are guided only by economics in their decision-making and that he generally ignored Trump’s jab. However, Powell’s term expires in 2026, which could give Trump an opportunity to appoint a more malleable successor.