Fewer US Fed rate cuts likely in 2025

Americans hoping for lower borrowing costs for homes, credit cards and cars may be disappointed after this week’s Federal Reserve meeting.

The Fed’s policymakers are likely to signal fewer interest rate cuts next year than were previously expected. The officials are set to reduce their benchmark rate, which affects many consumer and business loans, by a quarter-point to about 4.3 per cent when their meeting ends on Wednesday. At that level, the rate would be a full point below the four-decade high it reached in July 2023. The policymakers had kept their key rate at its peak for more than a year to try to quell inflation, until slashing the rate by a half-point in September and a quarter-point last month.

The problem is that while inflation has dropped far below its peak of 9.1 per cent in mid-2022, it remains stubbornly above the Fed’s 2.0 per cent target. As a result, the Fed, led by Chair Jerome Powell, is expected on Wednesday to signal a shift to a more gradual approach to rate cuts in 2025. Economists say that after cutting rates for three straight meetings, the central bank will likely do so at every other gathering, or possibly even less often than that.

“We’re on the cusp of a transition to them not cutting every meeting,” said David Wilcox, a former senior Fed official who is an economist with Bloomberg Economics and the Peterson Institute for International Economics. “They’re going to slow the tempo of cuts.”

The economy has fared better than officials expected it would as recently as September. And inflation pressures have proved more persistent. The presidential election added a wild card, too: President-elect Donald Trump has promised to enact policies – from much higher taxes on imports to mass deportations of people living illegally in the United States – that most economists say threaten to accelerate inflation.

“Growth is definitely stronger than we thought, and inflation is coming in a little higher,” Powell said recently. “So the good news is, we can afford to be a little more cautious” as the Fed’s officials seek to lower rates to what they consider a “neutral” level – one that neither spurs nor restricts growth.

On Wednesday, the policymakers will also issue their quarterly projections for growth, inflation, unemployment and their benchmark interest rate over the next three years. In September, they had collectively envisioned that they’d cut rates four times next year. Economists now expect just two or three Fed rate cuts in 2025. Wall Street traders foresee even fewer: Just two cuts, according to futures prices.

Fewer rate cuts by the Fed would mean that households and businesses would continue to face loan rates, notably for home mortgages, that would far exceed their levels before inflation began surging more than three years ago.

Some economists question whether the Fed even needs to cut this week. Inflation, excluding volatile food and energy costs, has been stuck at an annual rate of about 2.8 per cent since March. A year ago, the policymakers had forecast that that figure would have fallen to 2.4 per cent by now and that they’d have cut their key rate by three-quarters of a point. Instead, inflation has become stuck at a higher level, yet the Fed after Wednesday’s meeting will likely have lowered its benchmark rate by a cumulative full point.

AP