Fed Expected to Lower Interest Rates Tomorrow, With Next Year in Limbo

After nearly two years of high interest rates, experts predict the US Federal Reserve will lower rates for the third time this year at the conclusion of Wednesday's Federal Open Market Committee meeting. 

A 0.25% interest rate reduction on Dec. 18 will have some effect on US households, yet the immediate impact is likely to be minimal. The federal funds rate held steady at a range of 5.25% to 5.5% for over a year -- now, a third rate cut will bring it down to 4.25% to 4.5%.

The Fed's monetary policy has a big impact on the economy, influencing the spending and borrowing patterns of US households and businesses. When the Fed raises its benchmark rate to tame inflation, the money supply decreases, and the economy is supposed to slow. When the Fed lowers its benchmark rate, banks ease financial pressure on consumers, making it less expensive to finance, from car loans to credit cards to mortgages. 

Experts say this could be the last rate cut for a few months, meaning that borrowing rates will remain high throughout 2025. Since inflation has cooled but is still not at the target goal (and could reheat under the next administration), the central bank is likely to be more cautious and slow the pace of additional rate reductions next year. 

Why the Fed may cut rates at Wednesday's meeting

The Fed's role is to balance maximum employment and relative price stability. When deciding whether to raise or lower the federal funds rate (the rate used by banks to borrow and lend to one another overnight), it heavily weighs the monthly Bureau of Labor Statistics jobs report and the Consumer Price Index report. 
Annual inflation is gradually improving, down to 2.7% from 9.1% in mid-2022, though experts say the battle isn't over. Price growth remains stubborn, and inflationary pressures are expected to increase under President-elect Donald Trump's second term in the White House. 

The labor market also plays a role. In September, with signals that the labor market was softening, the central bank started lowering rates to avert a recession. Today, unemployment is higher than last year's low (4.2% versus 3.4%), but the job market isn't collapsing.

Following the release of recent labor and inflation data, market expectations shifted dramatically toward a 96% probability of a quarter-percentage-point rate cut, according to the CME FedWatch tool. However, economists are still debating the right policy move, especially with inflation potentially on the rebound.

Many experts believe that since a third rate cut was already scheduled for this year, Fed Chair Jerome Powell would be hesitant to change gears and hold rates steady, regardless of signs of a still-robust economy. 

"Powell has led markets to believe the Fed will cut, and he won't want to disappoint the markets," said economist Robert Fry.

Why experts predict fewer rate cuts in 2025

Since progress regarding inflation has stalled, the Fed isn't likely to cut rates again until there are more consistent signs of cooling. September's Summary of Economic Projections predicted around four rate cuts throughout 2025, and the Fed will release new projections at its upcoming meeting.

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

If the central bank lowers rates this week, Preston Caldwell, chief US economist at Morningstar, doesn't expect another cut right after Trump's inauguration. 

"If they do cut in December, there's a very high likelihood that they don't cut in January," said Caldwell. "If they were to hold off in December, then maybe they'll go ahead and cut in January." 

Though the Fed might consider an interest rate reduction in March, monetary policy will continue to depend on future economic data. Inflation remains above the Fed's annual target goal of 2%, and Trump's economic agenda could change the Fed's strategy in 2025. 

For example, Trump's pledge to impose tariffs on goods from several countries, including China and Mexico, would raise taxes on imported goods. Usually, businesses pass those costs down as higher consumer prices, which could reignite inflation.

But the outcome is yet to be seen. University of Central Florida economist Sean Snaith views tariffs as a negotiation tactic, part of a bargaining process between the US and its trading partners, not necessarily policies that will be pursued. "In the first Trump administration, we did see some tariffs enacted," said Snaith. "There were cries and fears that it would trigger inflation then, and that really didn't manifest itself." 

Regardless of the Fed's decisions, if you plan to borrow money for a home or car, or have existing credit card debt, pay close attention to your annual percentage rate. Shop around for better rates before borrowing or financing. If you have credit card debt, consider a balance transfer card with a 0% introductory period for relief from high APRs. And even if it eventually becomes less expensive to borrow in the long term, remember that lower interest rates also translate to diminished yields on savings accounts.

More about the Fed

• How the Federal Reserve Affects Mortgage Rates
• How the Fed's Rate Changes Impact Home Equity Loans and HELOCs
• Why You Should Care About the Fed's Interest Rate Decisions
• Strong Economy Leaves Fed in No Hurry to Cut Interest Rates

• Get Ready for Lower Savings Rates. Here's What Experts Say You Should Do Now