WASHINGTON (AP) – No one knows how Tuesday’s presidential election will turn out, but what the Federal Reserve will do in two days’ time is easy to predict. keeps getting coldthe Fed plans to lower interest rates 2nd time this year.
The presidential race may still be unresolved when the Fed concludes its two-day meeting on Thursday afternoon, but that uncertainty will not affect its decision to lower benchmark interest rates further. . But once a new president and Congress take office in January, the Fed’s future actions will become even more uncertain, especially if Donald Trump is re-elected to the White House.
President Trump’s proposals to impose high tariffs on all imports and begin mass deportations of illegal immigrants, as well as his threat to interfere in the normally independent Federal Reserve’s interest rate decisions, could cause inflation to spike. say economists. If inflation rises, the Fed will be forced to slow or stop cutting interest rates.
On Thursday, Fed policymakers led by Chairman Jerome Powell were on track to cut the benchmark interest rate by 0.5 percentage point to about 4.6%, following a 0.5 percentage point cut in September. Economists expect another quarter-point rate cut in December, and perhaps another similar move next year. Interest rate cuts tend to lower borrowing costs for consumers and businesses over time.
The Fed is cutting interest rates for unusual reasons. Interest rate cuts are often done to boost a struggling economy and weak job market by encouraging more borrowing and spending. but, The economy is growing steadilythe unemployment rate is Low at 4.1%Despite the hurricanes and the Boeing strike, the government said Friday that Net employment growth declines significantly last month.
Instead, the central bank is lowering interest rates as part of what Chairman Jerome Powell calls a “recalibration” toward a lower inflation environment. As inflation surged to a 40-year high of 9.1% in June 2022, the Fed raised rates 11 times, ultimately bringing the key rate to about 5.3%, also the highest in 40 years. Ta.
However, the year-on-year inflation rate rose in September. decreased to 2.4%With inflation so low, Powell and other Fed officials have said they no longer believe high borrowing rates are necessary. High borrowing rates typically limit growth, especially in interest rate-sensitive sectors such as housing and auto sales.
“This limit was put in place because inflation was rising,” said Claudia Sahm, chief economist at New Century Advisors and a former Fed economist. “Inflation is no longer rising. There is no longer any reason for restrictions.”
Fed officials have indicated that rate cuts will occur in stages. But almost everyone expressed support for further cuts.
Christopher Waller, a ranking member of the Fed’s Board of Governors, said: “To me, the central question is how much and at what pace to lower[the Fed’s main]interest rate target. “I think the standard has been set,” he said. he said in a lecture last month.
Jonathan Pingle, an economist at Swiss bank UBS, said Waller’s comments reflected “extraordinary confidence and belief that interest rates are heading down.”
Next year, the Fed is likely to start grappling with the question of how far to cut its benchmark interest rate. Ultimately, they may want to set growth at a level that neither restricts nor stimulates it, or in Fed parlance, is “neutral.”
Mr. Powell and other Fed officials admit they don’t know exactly where the neutral rate is. The Fed’s rate-setting committee estimated it at 2.9% in September. Most economists believe this is closer to 3%-3.5%.
The Fed chair said officials need to assess where neutrality lies depending on how the economy responds to rate cuts. For now, most officials believe the Fed’s current interest rate is well above neutral at 4.9%.
But some economists argue that the Fed doesn’t need to ease credit significantly, if at all, because the economy looks healthy even with high borrowing rates. The idea is that we are already approaching a level of interest rates that will neither slow nor stimulate the economy.
“If the unemployment rate stays in the low 4% range and the economic growth rate stays at 3%, is it a problem that the (Fed) interest rate is 4.75-5%?” said the chief economist at SMBC Nikko Securities. Joe LaVogna asked. “Why are you disconnecting now?”
The Fed’s latest meeting will take place immediately after Election Day, so Powell is likely to answer questions at Thursday’s press conference about the outcome of the presidential election and how it will affect the economy and inflation. He is expected to reiterate that the Fed’s decisions are not influenced by politics.
Trump imposed tariffs on washing machines, solar panels, steel and a wide range of products from China during his presidency, which President Joe Biden has kept in place. Research shows that washing machine prices rose as a result, but overall inflation did not rise much.
But President Trump is now proposing much broader tariffs, essentially import taxes, that would increase the price of many goods from abroad by about 10 times.
Many mainstream economists are wary of President Trump’s latest tariff proposals, arguing that they would almost certainly reignite inflation. A report from the Peterson Institute for International Economics concluded that President Trump’s main tariff proposals are: Inflation will be 2 percentage points higher Next year it will be otherwise.
Economists at Pantheon Macroeconomics say the Fed is more likely to raise interest rates in response to the tariffs this time around, “given that President Trump has signaled even larger tariff increases.”
“Therefore, if Mr. Trump wins, our 2025 projections reduce the reduction in fund rates,” they wrote.
