US Federal Reserve cuts interest rates but adjusts expectations for the future

The U.S. Federal Reserve lowered its interest rate target on Wednesday, but signaled it may take longer than expected to return inflation to the target rate of 2% per year. This means there will likely be fewer rate cuts in 2025 than expected.

The Fed’s Federal Open Market Committee lowered the target range for the federal funds rate, a benchmark used to set rates on everything from mortgages to credit card loans, by a quarter of a percentage point. between 4.25% and 4.5%.

The reduction was widely expected, but FOMC members updated their projections for the future, suggesting it may take until 2027 to return interest rates to 2%. As recently as September, they had planned to achieve this goal in 2026.

The rate band was also changed, as they believe it will ultimately reflect a “neutral” interest rate direction, that is, one that is neither restrictive nor stimulative. In September, they forecast a long-term neutral rate of between 2.5% and 3.5%. This range was between 2.8% and 3.6%.

Powell optimistic

Federal Reserve Chairman Jerome Powell said at a news conference Wednesday that the commission is trying to balance its fight against inflation, which it combats by raising interest rates, with its commitment to favor of full employment, which sometimes requires a reduction in rates.

He said the decision to cut rates was influenced by some “slowdown” in the labor market. However, he said the new target rate remains “significantly restrictive” even though the Fed has cut rates by a total of one percentage point since September.

Powell also told reporters that the U.S. economy remained strong and that he expected it to stay that way.

“The U.S. economy is simply doing very, very well, much better than its global peer group,” he said. “There is no reason to think that a slowdown is any more likely than it usually is. The outlook is therefore rather promising for our economy. But we must remain focused on our task and maintain a restrictive policy in order to bring inflation down to 2%.”

Trump effect

Mark Hamrick, senior economic analyst and head of BankRate.com’s Washington bureau, suggested that the slight change in the Fed’s expectations was due in part to President-elect Donald Trump’s election victory in November.

“There is increased uncertainty ahead given the Trump administration’s ambitions to boost economic growth, which has exceeded Fed expectations and the long-term trend this year,” Hamrick told VOA in a e-mail exchange. “For borrowers, consumers and everyone else, this suggests that rates will remain high for longer and will not return to historic pre-pandemic lows.”

Trump has signaled a desire to implement certain policy changes, including tariffs on imports, which economists generally view as inflationary.

“The big news is the change in the economic projections survey,” agreed Kenneth N. Kuttner, a professor of economics at Williams College and former assistant vice president for research at the Federal Reserve Bank of New York.

“FOMC members are seeing somewhat higher inflation than was the case in September,” Kuttner told VOA. “That, plus a reassessment of what ‘neutral’ means for the economy, suggests they plan to cut the funds rate less next year than they previously thought.”

Public discontent

The Fed’s announcement comes at a time when Americans continue to have a gloomy view of the state of the economy, despite significant improvements in most standard measures of its performance.

Americans suffered economically during the COVID-19 pandemic, when a combination of global supply chain bottlenecks and generous government stimulus programs combined to drive up prices. Inflation in the United States has reached a 40-year high, peaking at an annualized rate of 9.1% in June 2022.

Since then, sharp interest rate hikes by the Federal Reserve have brought inflation below 3% and close to the Fed’s target rate of 2%. The unemployment rate remained near its historic lows. Additionally, wages for American workers have increased at a faster rate than inflation since December of last year.

Nonetheless, Americans report very negative feelings about the economy. An Associated Press-NORC poll released this week found that two-thirds of U.S. adults rate the state of the economy as bad, while just 5 percent call it very good.

Political alignment appears to play a major role in perceptions of the economy. When responses were broken down by which party respondents identified with, 51% of Democrats described the economy as good or better, compared to just 16% of Republicans and 22% of independents.

However, in the wake of Trump’s election victory, 69% of Republicans said they expected 2025 to be a better year for the economy than 2024. In contrast, only 11% of Democrats said 2025 would be the best year, with 59% predicting it would be worse.

Limits on presidential power

Although the state of the economy appears to have been the most important factor in voters’ decision in November’s presidential election, outgoing Presidents Joe Biden and Trump have both spoken about the difficulty a president can have in office. ‘influence directly.

In a speech 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. 19 every day and millions of people out of work. He touted his record of restoring jobs and reducing inflation, but admitted many were still feeling economic hardship.

“Too many working-class and middle-class families face high housing and grocery prices and the daily necessities of life,” Biden said. He said many of the investments made in the economy during his four years in office simply have not had time to produce their full effects.

“We knew going into this that this was not going to happen in my…administration. It takes time to get there, but look two, four, six, eight, ten years from now,” Biden said.

During the election campaign, Trump frequently promised to lower prices at supermarkets, and he continued to do so after his victory, saying in a Dec. 8 interview with CBS News, “We’re going to bring those prices down significantly.”

However, this contradicts what he said Time magazine when he was interviewed as part of being named the publication’s Person of the Year. Asked if his presidency would be “a failure” if he was unable to bring down food prices, he replied: “I don’t think so.” …I’d like to knock them down. It’s hard to drop things once they’re in place. You know, it’s very hard.