The US Federal Reserve cuts interest rates by another quarter point

The US Federal Reserve cut its key interest rate on Wednesday by a quarter of a percentage point – its third cut this year – but also signaled that it expects to cut interest rates next year more slowly than previously thought, with inflation still well above the central bank’s level of 2 percent. goal.

The Fed’s 19 policymakers forecast that they would cut their benchmark interest rate by a quarter point just twice in 2025, down from their September estimate of four rate cuts. Their new forecasts suggest that consumers may not enjoy much lower interest rates next year for mortgages, car loans, credit cards and other forms of borrowing.

Fed officials confirmed they are slowing interest rate cuts as the benchmark interest rate approaches the level that policymakers refer to as “neutral” — a level that is believed to neither stimulate nor hinder the economy.

Wednesday’s forecast suggests policymakers may think they’re not too far away from that level. The benchmark interest rate is 4.3 percent after Wednesday’s move, which followed a sharp half-percentage-point cut in September and a quarter-percentage-point cut last month.

“I think the slower pace of (interest rate) cuts actually reflects the higher inflation readings we’ve seen this year and expectations that inflation will be higher” in 2025, Bank President Jerome Powell said in a press conference.

“We are closer to the neutral rate, which is another reason to be cautious about further moves.

“Despite this, we see ourselves as still on track to reduce production,” Powell said.

My color slips in response to the cut

The Canadian dollar fell further against the US dollar – which continues to outperform other currencies – in reaction to the downgrade on Wednesday afternoon.

“Jerome Powell was talking about a U.S. economy that is clearly outperforming not only domestic expectations, but also the rest of the world,” said Carl Shamuta, chief market strategist at Corpay Payments Management in Toronto.

“This means that US interest rates are high, and that makes US markets the best place in the world to deposit money.”

Several other factors have led to a decline in the Canadian dollar over the past few months and years, including the end of a “supercycle” that saw Canadian energy demand rise, as well as rising household debt leading to a slowdown in consumer spending and Trump’s threat to impose a 25 per cent tariff. . On Canadian goods.

“With that, you basically have a killer cocktail for the Canadian dollar,” Shamota told CBC News. The Canadian dollar could fall “at least a few cents” if Trump carries out his threat.

This would hit the export sector hard. Shamuta said consumer sentiment in Canada will decline, and companies will withdraw from investing further.

“All of this means that Canada will likely slide into recession.”

However, Shamota said Canadian exporters are hurt when the Canadian dollar underperforms too much against the U.S. dollar. A smaller correction may mean that some of these exports “will be put in a better position.”

“They will be able to sell exports cheaper to the world, and they will be able to grow,” he said. “So it’s a bit of a rebalancing.”

High inflation persists, and the pace of employment declines

The Fed’s interest rate cuts this year marked a reversal after more than two years of rising interest rates, which largely helped tame inflation but made borrowing painfully expensive for American consumers.

But now, the Fed faces a variety of challenges as it seeks to complete a “soft landing” for the economy, where higher interest rates are able to curb inflation without causing a recession. Chief among them is that inflation remains stubborn: according to the Fed’s preferred measure, annual “core” inflation, which excludes the most volatile groups, was 2.8 percent in October. This remains consistently above the central bank’s target of 2 percent.

Meanwhile, the economy is growing rapidly, suggesting that high interest rates are not holding it back much. As a result, some economists — and some Fed officials — argue that borrowing rates should not fall much further for fear of economic overheating and reigniting inflation.

On the other hand, the pace of hiring has slowed significantly since the beginning of 2024, which is a potential concern since one of the Fed’s mandates is to maximize hiring.

Powell said in his press conference: “We do not believe that we need further calming in the labor market to reduce inflation to less than 2%.”

Although the unemployment rate remains low at 4.2 percent, it has risen by almost a full percentage point in the past two years. Concerns about high unemployment rates contributed to the Federal Reserve’s decision in September to cut its key interest rate by half a percentage point larger than usual.

Trump’s tariff threats are adding to the uncertainty

Moreover, US President-elect Donald Trump has proposed a range of tax cuts and deregulation that could collectively stimulate growth. His threat of tariffs and mass deportations may accelerate inflation.

Powell and other Fed officials said they could not assess how Trump’s policies would impact the economy or their interest rate decisions until more details were provided. Even then, the results of the presidential election exacerbated economic uncertainty.

This was underscored by the quarterly economic forecasts released by the Federal Reserve on Wednesday.

Policymakers now expect overall inflation, as measured by their preferred measure, to rise slightly from 2.3 percent now to 2.5 percent by the end of 2025.

Officials also expect the unemployment rate to rise slightly by the end of next year, from 4.2 percent now to 4.3 percent, a still low level.