Americans hoping for lower borrowing costs on mortgages, credit cards, and auto loans may face disappointment as the Federal Reserve signals a more cautious approach to interest rate cuts.
With inflation still higher than the Fed’s 2% target, officials are expected to reduce the benchmark interest rate by a modest quarter-point at this week’s meeting, taking it to around 4.3%. While this marks a drop from the four-decade high of 5.25% set in July 2023, the pace of rate cuts is likely to slow next year compared to earlier projections.
The Federal Reserve has already reduced rates by half a point in September and a quarter-point in November, but inflation remains a concern. Despite dropping significantly from its peak of 9.1% in mid-2022, inflation persists above the Fed’s desired target. As a result, the central bank is shifting to a more gradual approach to rate cuts in 2025, signaling that cuts may occur less frequently than initially anticipated. Economists predict that after three consecutive rate cuts, the central bank will likely reduce rates at every other meeting or even less often.
“The pace of cuts is definitely slowing,” said David Wilcox, a former senior Fed official. “We’re on the cusp of a transition to not cutting every meeting.”
Economic conditions have been stronger than expected, with inflationary pressures proving more persistent, and officials are wary of cutting too aggressively. Federal Reserve Chair Jerome Powell has acknowledged that the economy is performing better than anticipated, and inflation remains stubbornly high. He emphasized the need for a cautious approach as the Fed works toward bringing rates to what they consider a “neutral” level, one that does not stimulate or suppress economic growth.
Economists are now predicting fewer rate cuts than previously forecast. In September, the Fed’s projections suggested four rate cuts in 2025, but the outlook has since changed. Many expect only two or three cuts next year, with Wall Street anticipating even fewer—just two reductions. This cautious stance means that consumers and businesses will likely face higher loan rates, particularly for housing, which had previously benefited from lower interest rates.
Some economists question whether the Fed even needs to cut rates at this stage. Core inflation, excluding volatile food and energy prices, has remained relatively stable at 2.8% since March, which is above the 2.4% target the Fed had originally forecast. With inflation not declining as quickly as anticipated, the Fed may find it more difficult to justify additional rate cuts.
Further complicating the Fed’s decision-making are uncertainties surrounding potential policy changes under President-elect Donald Trump. His proposed tariffs, corporate tax cuts, and mass deportations could increase inflationary pressures, making the Fed more cautious in its rate-cutting approach. Economists worry that the Fed may need to take a more measured path to avoid having to raise rates if inflation accelerates as a result of these policies.
Tara Sinclair, an economist at George Washington University, argued that the Fed may opt to hold rates steady for much of 2025.
“It seems easier to explain not cutting than to find themselves in a position where they would have to raise rates,” she said.
Additionally, the uncertainty surrounding the future policy landscape has led some to advocate for a slower pace of rate cuts to avoid fueling inflation.
The Fed’s decision-making is also influenced by the balance in the labor market. Although job growth has remained steady, the unemployment rate has risen slightly to 4.2%, indicating that the economy is not overheating. Housing markets, particularly sensitive to interest rate changes, have yet to experience significant benefits from the Fed’s previous rate cuts.
The Wall Street Journal, the Financial Times, and ABC News contributed to this report.
