WASHINGTON — The Federal Reserve is set to lower its key interest rate for the second consecutive time on Thursday, responding to a steady slowdown in inflation pressures that have strained many Americans’ finances in recent years.
However, the Fed’s future policy moves are now clouded by uncertainty following the results of the recent U.S. presidential election. With President-elect Donald Trump’s economic proposals widely viewed as potentially inflationary, the central bank is facing new challenges. Trump has also made it clear that, if elected, he believes he should have a say in the Fed’s interest rate decisions—a position that raises concerns about potential interference with the Fed’s traditionally independent stance.
The Federal Reserve has long emphasized its autonomy in making key decisions regarding borrowing rates, free from political influence. During his previous term, Trump was openly critical of the Fed’s rate hikes, which he blamed for slowing economic growth. With his return to the White House, some analysts fear that his potential involvement in future rate-setting could undermine the Fed’s independence.
At the same time, the U.S. economy is sending mixed signals. Economic growth remains solid, but signs of weakening job growth have emerged. Consumer spending, however, remains strong, prompting concerns that the Fed’s rate cuts may be premature. Some fear that further reductions in borrowing costs could overheat the economy and even reignite inflation.
Financial markets are complicating the Fed’s decision-making process. Following the Fed’s September rate cut, Treasury yields have surged, driving up borrowing costs across the economy. This has diminished the intended benefits of the Fed’s rate reduction, making loans and mortgages more expensive for consumers. For instance, the U.S. 30-year mortgage rate, which initially dropped after the Fed signaled rate cuts, has risen again in response to the increase in Treasury yields.
The situation is further complicated by investors’ expectations of inflationary pressures, fueled by Trump’s proposals, including a 10% tariff on all imports, higher taxes on Chinese goods, and the potential for larger federal budget deficits. These policies could push inflation higher, which would make it less likely for the Fed to continue cutting rates. According to economists at Goldman Sachs, Trump’s trade policies could push inflation up to 2.75% to 3% by mid-2026, a level that would likely prompt the Fed to halt its rate cuts.
As a result, market expectations for future rate cuts have diminished. The likelihood of a rate cut at the Fed’s January meeting has fallen to just 28%, down from 41% the day before the election and nearly 70% a month ago, according to CME FedWatch futures prices.
The Fed’s decision to adjust rates will be closely watched as it navigates this increasingly uncertain economic landscape.