Following the election, the Federal Reserve will likely continue with gradual interest rate cuts as inflation remains low and stable. The Fed’s recent approach, described as a “recalibration” to align with a lower inflation environment, suggests that further reductions are on the horizon, with another cut expected in December. Fed officials aim to reach a “neutral” rate that neither stimulates nor restricts economic growth, estimated by economists to be between 3% and 3.5%.
In the longer term, the rate direction will also depend on economic indicators, such as employment and growth rates. With the current rate above neutral, the Fed may make incremental cuts until the rate is more balanced with the economic climate.
Federal Reserve Expected to Lower Interest Rates Again
This week, the Federal Reserve is expected to cut its benchmark rate by a quarter-point, following a previous reduction in September. While interest rates usually impact mortgage costs, this cut is motivated not by economic weakness but by the recent cooling of inflation, which has dropped significantly from last year’s high of 9.1% to around 2.4%, close to the Fed’s 2% target.
Fed Chair Jerome Powell has referred to these adjustments as a “recalibration” to align with today’s lower inflation. With inflation controlled, the Fed believes high rates are no longer essential, as these can hold back growth in sectors sensitive to interest rates, like housing and autos.
Looking ahead, economists predict additional small cuts in December and next year, intending to reach a “neutral” rate that neither restricts nor stimulates economic growth. Many economists see this neutral rate between 3% and 3.5%, though it’s uncertain.
This week’s cut is expected to ease borrowing costs for consumers and businesses, which could boost market activity without pushing inflation higher.
