The Federal Reserve Will Drop Key Rates, But Consumers May Not Gain Immediately.

(VOR News) – If the Federal Reserve indicates on Wednesday that interest rate reductions will proceed more gradually next year than in recent months, the United States may experience only slight alleviation from the persistently elevated costs of borrowing for credit cards, auto loans, and mortgages.

The Federal Reserve is set to announce a quarter-point reduction in its benchmark rate, anticipated to decrease from around 4.6% to approximately 4.3%.

This represents the latest action undertaken, subsequent to a quarter-point cut in interest rates in November and a larger-than-usual half-point reduction in September.

The Wednesday meeting may mark a new era for the Federal Reserve.

The Federal Reserve is more inclined to adjust its monetary policy at alternate meetings, rather than at each meeting. The central bank policymakers may announce that they now expect to reduce their primary rate only two or three times in 2025, instead of the four reductions previously planned three months ago.

The Federal Reserve has utilised the rationale of a “recalibration” of ultra-high interest rates, originally aimed at curbing inflation that peaked at a four-decade high in 2022, to defend its measures thus far.

A considerable number of Federal Reserve officials contend that interest rates should not remain as elevated as they currently are, given the substantial decline in inflation. The Federal Reserve’s chosen index shows that inflation was 2.3% in October, a notable decline from the peak of 7.2% in June 2022.

Conversely, despite the swift economic growth, inflation has consistently exceeded the Federal Reserve’s 2% target for several months. The monthly retail sales statistics released by the government on Tuesday reveals that Americans, especially those with higher incomes, are inclined to spend liberally.

These trends, as per the views of several economists, suggest that further rate decreases could unduly stimulate the economy, perhaps leading to sustained high inflation.

The incoming president, Donald Trump, has advocated reducing taxes on overtime income, tips, and Social Security benefits, along with diminishing regulations in these domains.

When combined, these Federal Reserve practices can advance progress.

Alongside the threat of imposing various tariffs, President Trump has pledged to execute extensive deportations of migrants, both of which could exacerbate inflation.

Chair Jerome Powell and other Federal Reserve officials have indicated that they cannot assess the potential effects of President-elect Trump’s policies on the economy or their own interest rate decisions until further information is available and the likelihood of the proposed initiatives being enacted becomes clearer.

Consequently, the result of the presidential election has predominantly led to heightened economic uncertainty up to that point.

It seems improbable that the United States would soon experience the advantages of significantly reduced loan interest rates. As of last week, the average rate for a 30-year mortgage was 6.6%, lower than the top rate of 7.8% recorded in October 2023, according to Freddie Mac.

It is quite unlikely that mortgage rates of approximately three percent, which were common for nearly a decade prior to the onset of the pandemic, would be restored in the foreseeable future.

Federal Reserve officials have indicated a deceleration in interest rate reductions as the benchmark rate nears what policymakers designate as a “neutral” rate, a one that provides neither advantages nor disadvantages to the economy.

During a recent meeting, Powell stated, “Inflation is slightly elevated, and growth is unequivocally stronger than we anticipated.” Nevertheless, the positive aspect is that we can afford to use greater caution while we persist in our pursuit of neutrality.

Most other central banks globally are likewise lowering their benchmark interest rates. This week, the European Central Bank lowered its benchmark interest rate for the fourth time this year, from 3.25% to 3%.

This action was taken in reaction to the decline of inflation in the 20 euro-using countries, which has fallen to 2.3% from a peak of 10.6% in late 2022.

SOURCE: AP

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