The Federal Reserve cut interest rates for a second straight time on Thursday in an effort to keep the economy sailing along by easing the high borrowing costs it engineered to fight inflation. But going forward Fed policymakers must contend with a big new unknown: a second Trump presidential term.
The quarter-percentage-point reduction in the Fed’s benchmark rate was expected. It comes on the heels of a half-point cut in September when the central bank pivoted to loosen monetary policy after holding rates at a two-decade high to throttle back inflation.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Fed said in a short statement announcing the rate cut. “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the [Fed] Committee’s 2 percent objective but remains somewhat elevated.”
With inflation having come down sharply from its highs in 2022, officials had signaled a rate cut Thursday and another one in December, followed by several more next year. The Fed eventually wants to get to a point where interest rates are neither stimulating nor restricting the economy, as they are now.
But with Trump’s victory, the Fed’s future path looks a lot more uncertain.
Economists see risks on two fronts: If Trump follows through on his campaign promises to lower taxes and levy across-the-board tariffs on foreign goods, he could reignite inflation and force the Fed to pull back on its plans to cut rates.
The second is the threat of undue political influence by Trump that could impinge on the Fed’s independence. In Trump’s first term, he frequently harangued the Fed and the current chair, Jerome H. Powell, whom Trump had appointed, demanding lower interest rates. The Fed and financial markets consider the central bank’s independence sacrosanct for sound economic policymaking.
For now, many analysts still expect the Fed to shave another quarter percentage point from its main interest rate at its next meeting in December, but since Trump’s sweeping victory, odds have increased that Fed officials will pause next month or early next year as they wait to see what a second Trump administration might mean for fiscal policies and the economy.
