The Federal Reserve cut interest rates by a quarter point Thursday on the heels of the US presidential election earlier this week. Chair Jerome Powell also affirmed his commitment to serve out his term, expected to end in mid-2026, even if President-elect Donald Trump attempts to fire him.
It’s the second rate cut since the central bank began to lower borrowing costs in September, though the latest cut is smaller. Still, it represents further relief from the high cost of credit cards, auto loans and other debt.
Slower inflation and a cooling job market paved the way for Thursday’s decision.
More rate cuts are expected in 2025, though how many is up in the air because of the potential impacts of Trump’s proposed policies, such as tax cuts, deregulation, stiff across-the-board tariffs, and mass deportations. The full scope of those plans, and when they would begin to impact the US economy, is not clear.
In order for the Fed to continue cutting, it needs to see that price pressures remain in check and some economists have described the Trump economic agenda as “inflationary” to CNN.
Oxford Economics said in an analysis released Wednesday that “the outlook for 2025 doesn’t change appreciably” because it would take time for Trump’s policies to affect the economy, meaning the handful more rate cuts that officials projected in September could still take place next year. Analysts at Nomura, on the other hand, fully expect Trump to follow through with his plans quickly, estimating just one rate cut next year.
Most of Trump’s policies require congressional approval, which wouldn’t be a difficult endeavor since Republicans have claimed control of the Senate and seem on track to snag the House, too. At some point, Fed officials will have to incorporate expected changes in fiscal policy in their official economic projections.
Powell on the implications of Trump’s election
The Fed will eventually have to contend with Trump’s economic agenda, which is expected to have wide-ranging effects that impact economic growth, the labor market, and inflation — whenever it takes hold.
Powell said that, in the near term, the outcome of this year’s election “will have no effects on our policy decisions.” That’s a nod to a widely expected rate cut next month.
William English, a former senior Fed adviser, told CNN that he expects Fed policymakers to follow through with a December quarter-point cut because borrowing costs still have a tight grip on the economy. That decision, of course, still depends on what upcoming employment and inflation numbers show.
Powell said officials follow any proposed policies and economists then create “an alternative simulation before that happens, just to keep trying to understand it.” He added that once anything in Congress actually passes, those economic simulations are updated accordingly with even more data, helping officials form their baseline projections on the economy. Fed officials release economic projections every three months, and the next one is due December.
As usual, Powell deflected reporters’ questions touching on political subjects, such as what he learned about consumer attitudes from this week’s election outcome, but did weigh in on Trump’s power over the Fed and his own future plans.
When asked if Trump has the power to fire him, Powell, straightforwardly, said “No.” In a separate question asking him if he believes the US president has the power to demote him or any other Fed official in a leadership position, Powell said that’s “not permitted under the law.”
Powell weighs in on recent strong economic data
Powell said economic data since the September decision has been on the stronger side, including recent readings of the Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge.
“The latest economic data have been strong, and that is, of course, a great thing and highly welcome,” Powell said. “But, of course, our mandate is maximum employment, price stability, and we think that even with today’s cut, policy is still restrictive. We understand it’s not possible to say precisely how restrictive it is still.”
That’s a big reason why the Fed decided to cut rates further this week, even though the economy seems to be humming along. High interest rates still have the economy in a strangle hold, which poses a risk to the job market.
Powell said “the economy is performing well” but acknowledged that Americans are still feeling sour because of the lingering trauma of high inflation, even though it has improved markedly over the past two years. He said that an extended period of rising real earnings could help turn things around for their economic moods.
He stressed that officials are in no rush to get interest rates back to the so-called neutral rate of interest — a level of rates that neither stimulates nor dampens the economy. Since it’s clear that Fed officials are not in any rush to cut rates, that could mean the Fed stands pat a few times next year.
The Fed is watching these risks
Officials stated in their latest policy statement Thursday that the risk of the job market deteriorating and the risk of inflation stalling or re-accelerating are roughly the same magnitude now.
But in recent months, attention has shifted more toward the health of America’s labor market, which remains in decent shape, but has clearly lost momentum over the past year.
Employers had a seasonally adjusted 7.4 million job openings in September, according to Labor Department data, down considerably from 9.3 million in the same month a year earlier, while the rate of hiring fell to 3.5% from 3.7% during the same period. The unemployment rate stood at 4.1% in October, up from 3.8% a year earlier (though still at a historically low level.) Worker filings for ongoing unemployment benefits rose last week to the highest level since November 2021, an indication that it has become harder for unemployed Americans to find a job. Fed officials wrote in their statement that “since earlier in the year, labor market conditions have generally eased.”
But there are also signs of a robust economy, which could heighten the risk of inflation stalling or even picking up, undoing the Fed’s hard-fought progress to rein in price pressures.
The US economy expanded by a solid 2.8% annualized rate in the third quarter, driven by strong consumer spending. Business investment also continued to prop up economic growth in the third quarter, according to recent government data.
On the inflation front, Powell said “we’re not declaring victory, obviously,” but noted that officials feel “like the story is very consistent with inflation continuing to come down.”
