Experts say the Fed is likely to cut interest rates next week. But what’s the next step?

After nearly two years of rising interest rates, the Federal Reserve is widely expected to cut interest rates for the third time this year at the Federal Open Market Committee meeting on Wednesday.

The monetary policy pursued by the Federal Reserve has a significant impact on the economy, as it affects the economy Spending and borrowing Patterns of American Households and Firms. When the Fed raises its benchmark interest rate to tame inflation, the money supply declines and the economy is supposed to slow. When the Fed lowers its benchmark interest rate, banks ease financial pressure on consumers, making borrowing less expensive, from car loans to… Credit cards to Mortgages.

The 0.25% interest rate cut on December 18 will have an impact on US households, but it will take a long time. The immediate impact is likely to be minimal. The federal funds rate has been holding steady at a range of 5.25% to 5.5% for more than a year, and a third rate cut will lower it to a range of 4.25% to 4.5%.

Borrowing rates remain high through 2025, and experts say this could be the last rate cut for a while. Financial markets are betting that the central bank will slow the pace of additional interest rate cuts next year or stop them altogether.

We expect another rate cut at next week’s Fed meeting

Since the Fed’s role is to balance maximum employment with relative price stability, it weighs heavily on the monthly Bureau of Labor Statistics jobs report and Consumer Price Index Report When deciding whether to raise or lower the federal funds rate, which is the rate that banks use to borrow and lend to each other overnight.

Annual inflation is gradually improving, falling to 2.7% from 9.1% in mid-2022. But price growth remains stubborn, and inflationary pressures are expected to increase with the next administration.

The labor market also plays a role. In September, with signs of a softening labor market, the central bank began cutting interest rates to avoid a recession. Today, unemployment rates are higher than last year’s lows (4.2% versus 3.4%), but the job market is not collapsing.

Following the publication of employment and inflation data earlier this week, market expectations shifted sharply towards a 96% probability of a quarter-point interest rate cut, according to the European Central Bank report. CME FedWatch tool.

Many experts believed that since a third rate cut was already on the cards for this year, the economic outlook needed to shift more dramatically for the Fed to change its plans.

“(Fed Chairman Jerome) Powell led the markets to believe that the Fed would cut, and he would not want to disappoint the markets,” he said. Robert Frychief economist at Robert Frey Economics.

We expect smaller interest rate cuts in 2025

Since progress on inflation has stalled, the Fed is unlikely to cut interest rates again until there are more consistent signs of a slowdown. Summary of economic forecasts for September Expect about four interest rate cuts throughout 2025, and the Fed will issue new forecasts at its next meeting.

“I now expect two rate cuts in 2025 versus the four I expected a few months ago,” Fry said.

If the central bank cuts interest rates next week. Preston CaldwellMorningstar’s chief U.S. economist does not expect another cut immediately after President-elect Donald Trump’s inauguration.

“If they cut production in December, there’s a very good chance they won’t cut in January,” Caldwell said. “If they postpone it in December, maybe they will go ahead and cut back in January.”

Although the Fed may consider a rate cut in March, monetary policy will continue to depend on future economic data. Inflation remains above the Federal Reserve’s annual target of 2%. Trump’s economic agenda The Fed’s strategy could change in 2025.

For example, Trump’s pledge to impose tariffs on goods from several countries, including China and Mexico, would lead to higher taxes on imported goods. Typically, companies pass these costs down as higher consumer prices, which could reignite inflation.

But the result has not yet appeared. University of Central Florida Economist Sean Snaith It views tariffs as a negotiation tactic, part of the bargaining process between the United States and its trading partners, not necessarily the policies to be followed. “In the first Trump administration, we saw some tariffs take effect,” Snaith said. “There were cries and fears that this would lead to inflation at the time, and that never really manifested itself.”

Regardless of the Fed’s decisions, if you plan to Borrow money to buy a house Or a car, or have a list credit card debt, pay close attention to your annual percentage rate. Shop around for better rates before borrowing. If you have credit card debt, consider a balance transfer card with a 0% introductory period to mitigate a higher APR. Even if borrowing eventually becomes less expensive in the long run, remember that lower interest rates also translate into lower yields on bonds. Savings accounts.

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