The Federal Reserve on Wednesday cut its interest rate target by a quarter of a percentage point, the third such rate cut since the Fed pivoted to easing monetary policy in September.
After a two-day meeting of its monetary policy committee in Washington, the Fed announced it would move its rate target to 4.25% from 4.50%. Investors anticipated the move. The Fed’s target rate is now a full percentage point lower than it was before it began cutting rates.
Still, despite the Fed lowering its interest rate target by a full percentage point in just a matter of months, interest rates on mortgages, Treasuries, credit cards, and other forms of debt have not meaningly fallen in turn. That has dampened the tangible impact of the cuts for consumers.
The Fed has signaled that the cuts would continue gradually. The latest rate cut is an acknowledgment by officials of signs that the labor market is somewhat weakening. It is also meant to assuage general consumer pain with having interest rates be so high.
This is also the final Fed meeting before President-elect Donald Trump enters office. Trump will inherit an economy with gradually declining, yet still sticky inflation, a labor market with flattening employment growth, and relatively strong economic output.
The most often cited inflation gauge for the public is the consumer price index. CPI inflation hit its lowest point since inflation started picking up in September, but has since ticked up a bit to 2.7% — showing that inflation is proving more stubborn than expected. The Fed’s goal is 2% inflation.
Aside from the CPI, the Fed looks at another inflation gauge, the personal consumption expenditures index, when analyzing its next steps. The PCE index also ticked up in the most recent reading, rising to 2.3% in October.
Core PCE inflation, a measure of inflation that strips out volatile energy and food prices, rose to a 2.8% year-over-year rate.
Trump’s relationship with Fed Chairman Jerome Powell will also be something to watch. Powell, a Republican, was first nominated to lead the Fed by Trump, and Biden later renominated him.
Powell managed to garner support from Democrats because of his defense of the central bank’s independence during the Trump years and for his strong support for the pursuit of full employment. He and Trump were in open conflict over monetary policy.
While in office, Trump criticized Fed policy, blasting the central bank for raising interest rates too quickly. It was reported Trump had private discussions about firing Powell. The Fed chairman said at the time that he did not believe that Trump had the authority to fire him.
The flurry of interest rate cuts in the latter part of 2024 marked the first time that the Fed has eased monetary policy since the central bank slashed rates to near-zero in 2020 at the outset of the pandemic. At the time, the stock market was in free fall, and the economy had fallen into a recession because of the pandemic.
The unprecedentedly low rates were designed to spur economic activity and spending. The Fed kept interest rates that low until March 2022. Some economists argue that holding rates so low for so long caused the economy to overheat and inflation to spike.
At its peak in mid-2022, inflation was clocking in at around 9% — the worst bout of inflation in generations. The higher prices made life very difficult for consumers, and Trump was able to capitalize on voter discontent with inflation during this year’s election.
If inflation continues to prove stickier than anticipated, it could cause the Fed to dial back the magnitude and frequency of interest rate cuts in 2025. Conversely, if the labor market starts to meaningly deteriorate, it could spur the Fed to cut rates to shore up the economy and avoid a recession.
The economy added 227,000 jobs in November, and the unemployment rate rose one-tenth of a percentage point to 4.2%, the Bureau of Labor Statistics reported earlier this month. That was a solid reading, especially after a dismal employment report in October.
The October jobs report showed job growth essentially stalling out, with just 12,000 jobs in the month, although that figure was later revised up to a still-low 36,000 jobs.
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One bright spot for the Fed and for the economy more generally has been GDP growth, which is a broad measure of domestic economic output.
The economy grew at a 2.8% annual rate in the third quarter of this year, just under the 3% rate the quarter before. Official GDP data from the final quarter of this year will first be released in 2025, but the Atlanta Fed’s “GDP Now” tracker predicts that GDP growth in the fourth quarter will clock in at a strong 3.2%, according to the latest estimate.