The Federation intends to cut interest rates again

CHRISTOPHER RUGABER, AP Economics Writer

WASHINGTON (AP) — The Federal Reserve cut its key interest rate by a quarter point Thursday in response to a steady decline in once-high inflation that angered Americans and contributed to Donald Trump’s victory in this week’s presidential election.

The rate cut follows a broader half-point cut in September and reflects the Fed’s renewed focus on supporting the labor market as well as tackling inflation, which is now barely above the central bank’s 2% target.

Thursday’s decision cuts the Fed’s benchmark rate to about 4.6%, down from a four-decade high of 5.3% before its September meeting. The Fed kept rates that high for more than a year to combat its worst streak of inflation in four decades. Annual inflation has since fallen from a peak of 9.1% in mid-2022 to a three-and-a-half year low. 2.4% in September.

Asked at a news conference how Trump’s election might affect Fed policy, Chairman Jerome Powell said the election “will not have any impact on our (interest rate) decisions in the near future.”

But Trump’s election, beyond its economic consequences, has raised the specter intervention The White House in the Fed’s policy decisions. Trump has said that as president he should have a say in the central bank’s decisions on interest rates. The Fed has long maintained its role as an independent institution capable of making tough decisions about borrowing rates, free from political interference. However, during his previous White House tenure, Trump publicly attacked Powell after the Fed raised rates to fight inflation, and he may do so again.

Asked at a news conference Thursday whether he would resign if Trump asked him to, Powell, who will have a year left in his second four-year term as Fed chairman when Trump takes office, responded simply: “No.” .

And he said he doesn’t think Trump can fire or demote him: That’s “not legally permissible,” Powell said.

In its statement after the end of its last meeting, the Fed said that “the unemployment rate has risen but remains low,” and while inflation has fallen closer to its 2% target, it “remains somewhat elevated.”

After cutting rates in September – the first such move in more than four years – Fed policymakers predicted they would make further quarter-point rate cuts in November and December and four more next year. But with the economy now largely stable and Wall Street expecting faster growth, larger budget deficits and higher inflation under a Trump presidency, further rate cuts may become less likely.

Powell said the Fed intends to continue cutting its key rate over time to what the central bank calls “neutral” – a level that does not restrict or stimulate growth. He and other officials acknowledged they don’t know exactly where the neutral rate is.

“We are on the path to a more neutral position,” the Fed chairman said. “It hasn’t changed at all. We just need to look at where the data is.”

The economy clouds the picture, sending mixed signals. steady growth But weakening of hiring. Still, consumer spending was healthy, fueling concerns that the Fed does not need to cut borrowing costs and that it could overstimulate the economy and even re-accelerate inflation.

Financial markets are presenting another challenge to the Fed, with investors pushing Treasury yields sharply higher after the central bank cut rates in September. The result has been higher borrowing costs across the economy, reducing the benefit to consumers from the Fed’s half-point rate cut it announced after its September meeting.

Broader interest rates have risen as investors expect higher inflation, a larger federal deficit and faster economic growth under President-elect Trump. Trump’s plan to impose at least a 10 percent tariff on all imports, significantly raise taxes on Chinese goods, and carry out mass deportations of illegal immigrants is almost certain. increase inflation. This will reduce the likelihood that the Fed will continue to lower its key rate. Annual inflation measured by the central bank’s preferred indicator fell to 2.1% in September.

Economists at Goldman Sachs estimate that Trump’s proposed 10% tariff, as well as his proposed taxes on Chinese imports and cars from Mexico, could bring inflation back to around 2.75% to 3% by mid-2026.

Fed rate cuts typically lead to lower borrowing costs for consumers and businesses over time. This time around, however, mortgage rates fell in anticipation of a rate cut, but have since risen again as the economy grew rapidly, helped by consumer spending. High borrowing costs not only for mortgages but also for auto loans and other large purchases, even as the Fed cuts its benchmark rate, have created a potential problem for the central bank: Its efforts to support the economy by lowering borrowing costs may not be effective. will bear fruit if investors act to raise long-term borrowing rates.

The economy has grown at a strong annual rate of just under 3% over the past six months, while consumer spending, fueled higher income buyers — rose strongly in the July-September quarter.

But companies have cut back on hiring, and many people left unemployed are struggling to find work. Powell suggested that the Fed is cutting its key rate in part to support the labor market. If economic growth continues at a healthy pace and inflation rises again, the central bank will come under increasing pressure to slow or stop cutting rates.

Originally published: November 7, 2024 9:10 AM MST