For the third time this year, the Federal Reserve lowered its federal funds rate as part of its final interest rate decision of 2024. As anticipated, policymakers voted 11 to 1 to reduce the central bank’s main lending rate to between 4.25 and 4.50 percent, the Fed said in a statement. The markets were caught off guard, however, when they announced that they would only be making two quarter-point cuts next year, down from an average of four in September.
This Latest Fed’s Interest Rate Cut coincides with the coming policy changes announced by President-elect Donald Trump, a weaker labor market, and sticky inflation that Americans are currently dealing with. This move highlights the Fed’s careful balancing act between promoting economic expansion and preserving price stability.
Latest Fed’s Interest Rate Cut
Many people are curious about the implications of the Fed’s quarter-point interest rate cut1 in November, which came shortly after the greater half-point drop in September. The first two cuts since March 2020 are these two. Your mortgage, credit cards, savings accounts, and the economy as a whole may all be impacted by the most recent rate drop. For short-term loans to other banks, banks charge this interest rate. With the newest rate cut, it fell from a range of 4.75% to 5%, 3 to 4.5%, and finally to 4.75%.
How it could impact your wallet & what to do?
- Imagine that the Federal Reserve is the U.S. Bank. It oversees the nation’s financial and monetary systems in an effort to preserve our economic stability. Determining the Federal Funds Rate target interest rate, which banks sometimes use as a foundation for determining their own rates, is one of these responsibilities.
- The Fed attempts to maintain inflation between 2% and 3%, and it modifies the Federal Funds Rate in response to economic indicators like inflation. To assist control inflation, the Fed may decide to lower this rate, which would make borrowing money cheaper and allow consumers to make larger purchases.
- Despite the possibility of a few dollars being saved on monthly loan payments, customers shouldn’t anticipate significant relief. For cardholders, the average annual percentage rate (APR) on credit cards has decreased marginally from 24.92 percent in September to 24.43 percent. The cost of borrowing became somewhat lower for customers as personal loan rates and HELOCs also experienced slight decreases. Unfortunately, because Treasury bond yields have a greater influence on mortgage rates than the Fed’s rate decisions, they are still close to 20-year highs.
Higher growth, higher inflation
The 19-member FOMC dropped its rate expectations by half, estimating only two quarter-point rate reduction on average in 2025 in new economic estimates released with the rate decision. They also increased their prediction that headline US inflation would reach 2.5 percent in 2021 and that it would not recover to 2 percent until 2027.
For the world’s largest economy, FOMC members raised their growth projections to 2.5% for this year and 2.1% for 2025. Policymakers anticipate that the unemployment rate will be marginally lower than anticipated this year at 4.2%, then slightly up to 4.3 % in 2025 and 2026 a figure that at least one analyst deemed excessively optimistic
Where do interest rates likely to go in 2025?
- The Fed usually refrains from committing to a future course of action because it must remain flexible in order to react to any potential economic developments. A new dot plot, a crucial figure that illustrates how FOMC members anticipate interest rates to change over the coming year and beyond, was among the updated economic estimates that were released at this meeting.
- According to the dot plot, a median of Fed members anticipate that the fed funds rate would drop to between 3.75% and 4.0% by the end of 2025. This is an increase from the last dot plot, which predicted that the fed funds rate would drop to between 3.25% and 3.5% by the end of 2025.
- According to that estimation, there will likely be two additional quarter-percentage-point decreases during the eight sessions it will have in 2025. However, the Fed has not made any commitments, and those dots are the individual members’ personal assessments. Furthermore, they provide no information about when any additional rate decreases will occur.
Will interest-rate policy change due to administration transition?
Even though many government agencies undergo changes with a new presidential administration, the Fed is designed to be more independent, for instance by reporting to Congress instead of the president. The tenure of Chair Jerome Powell as central bank boss does not end until May 2026. One seat on the Fed’s Board of Governors normally becomes available for appointment every two years, and members are chosen by the president to serve 14-year terms.
Because of this framework, the Fed’s policy is somewhat consistent and it is doubtful that a major change in administration will result in a change in strategy. However, it is generally anticipated that the incoming Trump administration would implement some big policy changes, many of which could have repercussions for the whole economy. The specifics of these changes are still unknown and so the Fed will probably keep a careful eye on any policy changes that could affect the forecast for unemployment or inflation.
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