The Federal Reserve announced a crucial decision on Thursday to cut its key interest rate by a quarter-point. This move reflects an effort to address the significant decline in inflation, a factor that has stirred discontent among Americans and influenced the recent presidential election outcome favoring Donald Trump. The latest reduction follows a half-point cut in September, signaling the Federal Reserve’s adjusted focus on stabilizing the job market and managing inflation, which hovers just above its 2% target.
Federal Reserve Chair Jerome Powell, when questioned about the potential impacts of Trump's election on the Fed’s policy direction, assured that there would be no immediate implications for interest rate decisions. However, Trump's presidency, beyond its economic footprint, ignites concerns about possible interference by the White House in Federal Reserve policies. Historically, the Fed has protected its independence from political influences, making tough decisions on interest rates without external pressure. During his earlier tenure, Trump publicly criticized Powell following the Fed's decision to raise rates to combat inflation, and similar situations might arise again.
When asked hypothetically whether he would resign if Trump requested, Powell, whose term extends another year into Trump's presumed next term, confidently stated he would not comply. Powell emphasized that Trump lacks the legal authority to fire or demote him. The current rate adjustment brings the benchmark rate to approximately 4.6%, a decrease from the previous forty-year peak of 5.3%. This rate was maintained high to curb inflation, which has since reduced from a 9.1% spike in mid-2022 to 2.4% in September. After concluding its latest policy meeting, the Fed indicated in a statement that although unemployment has risen slightly, it remains at low levels. Inflation is nearing the 2% target but remains somewhat elevated.
In September, Federal Reserve policymakers anticipated additional quarter-point rate cuts in November and December, alongside four more cuts next year. However, the current solid economic indicators and expectations of accelerated growth, increased budget deficits, and heightened inflation under Trump's leadership, suggest fewer rate cuts might be necessary. Typically, Federal interest rate cuts result in decreased borrowing costs over time for consumers and businesses. Although Powell avoided committing to further rate cuts in December or those planned for 2025, economic signs point towards potentially lesser reductions than initially projected. The improving job market and overall economy appear more robust than during the September announcement of an extensive half-point reduction.
Economist Matthew Luzzetti of Deutsche Bank articulated there is no pressing need for the Fed to rush into lowering rates more significantly, based on current economic data. On the other hand, Diane Swonk, Chief Economist at KPMG, expressed that Powell's reluctance to speculate on future moves likely stems from the uncertainties surrounding policy changes under Trump's administration. In conclusion, Powell reaffirmed his confidence that inflation, despite some recent fluctuations, will continue its gradual decline back towards the Federal Reserve’s 2% target over the coming years.
