“Growth is definitely stronger than we thought, and inflation is coming in a little higher,” US Federal Reserve Chairman Jerome Powell said recently. “So the good news is that we can afford to be a little more careful when we try to be neutral.” File | Photo credit: Reuters
Federal Reserve officials on Wednesday (Dec. 18, 2024) are likely to signal a slower pace of rate cuts next year compared to recent months, which would mean Americans could enjoy only mild relief from still-high borrowing costs for mortgages, cars and other loans. loans and credit cards.
Also read: The Federal Reserve is likely to slow its interest rate cuts as inflationary pressures remain high
The Fed will announce a quarter-point cut in its benchmark interest rate, from about 4.6% to about 4.3%. The latest move would follow a larger-than-usual rate cut of half a point in September and a quarter-point cut in November.
However, Wednesday’s meeting (December 18, 2024) could mark a shift to a new phase in Fed policy: Instead of a rate cut at every meeting, the Fed is more likely to cut rates at every other meeting at most decrease. Central bank policymakers could indicate that they expect to cut their policy rate only 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” from ultra-high interest rates aimed at curbing inflation, which hit a four-decade high in 2022. With inflation now much lower – at 2.3% in According to the Fed’s preferred gauge, rates fell in October from a peak of 7.2% in June 2022. Many Fed officials argue that rates are not as does not have to be high.
But inflation has remained above the Fed’s 2% target in recent months as the economy continues to grow strongly. On Tuesday (Dec. 17, 2024), the government’s monthly report on retail sales showed that Americans, especially those with higher incomes, are still willing to spend money freely. Some analysts say these trends raise the risk that further interest rate cuts could provide an outsized boost to the economy and therefore keep inflation high.
In addition, President-elect Donald Trump has proposed a series of tax cuts — on Social Security benefits, tip income and overtime income — as well as a rollback of regulations. Collectively, these steps could boost growth. At the same time, Trump has threatened to impose a variety of tariffs and seek mass deportations of migrants, which could accelerate inflation.
Chairman Jerome Powell and other Fed officials have said they won’t be able to gauge how Trump’s policies could affect the economy or their own interest rate decisions until more details become available and it becomes clearer how likely it is that the new president’s proposals will actually are adopted. Until then, the outcome of the presidential elections had mainly increased uncertainty surrounding the economy.
Either way, it seems unlikely that Americans will be able to enjoy much lower borrowing costs anytime soon. The average 30-year mortgage rate was 6.6% last week, below the peak of 7.8% reached in October 2023, according to mortgage giant Freddie Mac. But the roughly 3% mortgage rate that existed almost a decade before the pandemic is not. will return in the near future.
Fed officials have underscored that they are slowing their rate cuts as their benchmark interest rate approaches a level that policymakers call “neutral” — the level that neither stimulates nor hinders the economy.
“Growth is definitely stronger than we thought, and inflation is coming in a little higher,” Mr. Powell said recently. “So the good news is that we can afford to be a little more careful when we try to be neutral.”
Most other central banks in the world are also cutting their interest rates. Last week, the European Central Bank cut its key interest rate for the fourth time this year from 3.25% to 3%, after inflation in the twenty countries that use the euro fell from a peak of 10.6% at the end of 2022 to 2 .3%.
Published – 18 Dec 2024 12:02 IST
