The U.S. Federal Reserve on Wednesday lowered its target interest rate but signaled it might take longer than previously expected to bring inflation down to the central bank’s target rate of 2% per year. That means there will likely be fewer rate reductions in 2025 than had been projected.
The Fed’s Federal Open Market Committee lowered the target range of the federal funds rate, a benchmark that is used to set rates for everything from mortgages to credit card loans, by one-quarter of a percentage point to between 4.25% and 4.5%.
The reduction was widely expected, but FOMC members updated their projections for the future, suggesting it might take until 2027 to get interest rates down to 2%. As recently as September, they had projected that they would achieve that goal in 2026.
Also changed was the range of rates that they believe will eventually reflect a “neutral” interest rate stance – that is, one that is designed to be neither restrictive nor stimulative. In September, they projected a long-run neutral rate of between 2.5% and 3.5%. That range ticked up to between 2.8% and 3.6%.
Powell upbeat
Federal Reserve Board Chair Jerome Powell said in a press conference Wednesday that the committee was trying to balance its fight against inflation, which it combats by raising interest rates, with its commitment to full employment, which sometimes requires lowering rates.
He said the decision to cut rates was influenced by some “softening” in the job market. However, he said the new target rate was still “meaningfully restrictive,” even though the Fed has cut rates by a total of 1 percentage point since September.
Powell also told reporters that the U.S. economy remained strong, and that he expected it to remain so.
“The U.S. economy is just performing very, very well — substantially better than our global peer group,” he said. “There’s no reason to think a downturn is any more likely than it usually is. So, the outlook is pretty bright for our economy. We have to stay on task, though, and continue to have restricted policy so that we can get inflation down to 2%.”
Trump effect
Mark Hamrick, senior economic analyst and Washington bureau chief of BankRate.com, suggested that the slight change in the Fed’s expectations had to do in part with President-elect Donald Trump’s election victory in November.
“There’s heightened uncertainty ahead given the ambitions of the Trump administration aiming to boost economic growth, which performed above the Fed’s expectations and the long-term trend this year,” Hamrick told VOA in an email exchange. “For borrowers, consumers and everyone else, this suggests that rates will remain elevated for longer and won’t return to record-low pre-pandemic levels.”
Trump has signaled a desire to implement some policy changes, in particular tariffs on imports, that economists generally view as inflationary.
“The big news is the change in the survey of economic projections,” agreed Kenneth N. Kuttner, a professor of economics at Williams College and a former assistant vice president of research at the Federal Reserve Bank of New York.
“The members of the FOMC are seeing inflation running a little bit higher than had been the case back in September,” Kuttner told VOA. “That, plus a reassessment of what ‘neutral’ is for the economy, suggests they’re anticipating cutting the funds rate less next year than they previously thought they were going to.”
Public discontent
The Fed’s announcement came at a time when Americans continue to have a dim view of the state of the economy, despite significant improvements on most standard measures of its performance.
Americans soured on the economy during the COVID-19 pandemic, when a combination of worldwide supply chain bottlenecks and generous government stimulus programs combined to drive prices up sharply. Inflation in the U.S. soared to 40-year highs, peaking at an annualized rate of 9.1% in June 2022.
Since then, sharp interest rate hikes by the Federal Reserve have forced inflation down below 3% and close to the Fed’s target rate of 2%. The unemployment rate has remained near historic lows. Additionally, wages for American workers have been growing at a rate higher than inflation since December of last year.
Nevertheless, Americans report sharply negative sentiments about the economy. An Associated Press-NORC poll released this week found that two-thirds of U.S. adults described the status of the economy as poor, while a mere 5% characterized it as very good.
Political alignment appears to play a major role in perceptions of the economy. When the responses were broken down by the party respondents identified with, 51% of Democrats described the economy as good or better, compared with only 16% of Republicans and 22% of independents.
However, in the aftermath of Trump’s election victory, 69% of Republicans said they expected 2025 to be a better year for the economy than 2024. By contrast, only 11% of Democrats said 2025 would be the better year, with 59% predicting that it would be worse.
Limits of presidential power
Although the state of the economy appears to have been the most important factor in driving voters’ decisions during November’s presidential elections, both outgoing President Joe Biden and Trump have spoken about the difficulty a president can have in directly influencing it.
In remarks this month at the Brookings Institution, Biden reminded his audience that when he took office in 2021, he inherited an economy shattered by the pandemic, with 3,000 Americans dying of COVID-19 every day and millions out of work. He touted his record of restoring jobs and reducing inflation but admitted that many were still feeling economic pain.
“Too many working- and middle-class families struggle with high prices for housing and groceries and the daily needs of life,” Biden said. He said that many of the investments made in the economy over his four years in office have simply not had time to come into full effect.
“We knew in the beginning this wasn’t going to come to fruition in my … administration. It takes time to get this done, but watch two, four, six, eight, 10 years from now,” Biden said.
On the campaign trail, Trump frequently promised to lower prices at the supermarket, and he continued to do so after his victory, saying in an interview on December 8 with CBS News, “We’re going to bring those prices way down.”
However, that contradicted what he told Time magazine when he was interviewed in connection with being named the publication’s Person of the Year. Asked if his presidency would be “a failure” if he was unable to bring down grocery prices, he said, “I don’t think so. … I’d like to bring them down. It’s hard to bring things down once they’re up. You know, it’s very hard.”
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