Experts say the Fed is likely to cut rates next week. But what’s next?

After nearly two years of high interest rates, the Fed is expected to cut rates for the third time this year at the Federal Open Market Committee meeting on Wednesday.

The Fed’s monetary policy has a major impact on the economy, affecting the spending and borrowing patterns of American households and businesses. When the Fed raises its benchmark rate to tame inflation, the money supply shrinks and the economy should slow down. When the Fed lowers its benchmark rate, banks ease financial pressure on consumers, making it cheaper to borrow everything from car loans to credit cards yes mortgages.

The 0.25% interest rate cut on December 18 will have an effect on US households, but still the immediate impact is likely to be minimal. The federal funds rate has held steady in the 5.25% to 5.5% range for more than a year, and the third rate cut will drop it to a 4.25% to 4.5% range.

Borrowing rates remain high until 2025, and experts say this could be the last rate cut for some time. Financial markets are betting that the central bank will slow the pace of further rate cuts next year or suspend them altogether.

Expect another rate cut at next week’s Fed meeting

Since the Fed’s role is to balance maximum employment and relative price stability, it leans heavily toward the monthly Report on the work of the Bureau of Labor Statistics and the Consumer Price Index Report when deciding whether to raise or lower the federal funds rate, the rate banks use to borrow and lend to each other overnight.

Annual inflation is gradually improving, falling to 2.7% from 9.1% in mid-2022. But price growth remains stubborn, and inflationary pressures are expected to increase with the next administration.

The labor market also plays a role. In September, with signs that the labor market was softening, the central bank began cutting rates to stave off recession. Today, unemployment is higher than last year’s low (4.2% versus 3.4%), but the labor market is not collapsing.

After the release of those jobs and inflation data earlier this week, market expectations shifted dramatically toward a 96 percent likelihood of a quarter-percentage-point rate cut, according to CME FedWatch tool.

Many experts believe that with a third rate cut already on the cards this year, the economic outlook would have to change more dramatically for the Fed to change its plans.

“(FED Chairman Jerome) Powell has led the markets to believe the Fed will taper, and he won’t want to disappoint the markets,” he said Robert Freechief economist at Robert Free Economics.

Expect fewer rate cuts in 2025

With progress on inflation stalled, the Fed is unlikely to cut rates again until there are more consistent signs of cooling. September summary of economic projections forecast about four rate cuts through 2025, and the Fed will release new projections at its upcoming meeting.

“I now expect two rate cuts in 2025 compared to the four I expected a few months ago,” Frye said.

If the central bank cuts rates next week, Preston Caldwellchief US economist at Morningstar, does not expect another cut immediately after the inauguration of President-elect Donald Trump.

“If they’re cutting in December, there’s a good chance they’re not cutting in January,” Caldwell said. “If they would give up in December, then maybe they will go ahead and stop in January.”

Although the Fed may consider cutting interest rates in March, monetary policy will still depend on future economic data. Inflation remains above the Fed’s annual target of 2%, and Trump’s economic agenda could change the Fed’s strategy in 2025.

For example, Trump’s promise to impose tariffs on goods from several countries, including China and Mexico, would increase taxes on imported goods. Those costs are usually passed on by businesses as higher consumer prices, which could fuel inflation again.

But the outcome is yet to be seen. University of Central Florida Economist Old Snaith views the tariffs as a negotiating tactic, part of the negotiation process between the US and its trading partners, and not necessarily a policy to be implemented. “In the first Trump administration, we saw some tariffs enacted,” Snaith said. “Then there were cries and fears that it would cause inflation, and it really didn’t manifest itself.”

Regardless of the Fed’s decisions, if you plan borrow money for a house or a car, or there are credit card debt, pay special attention to your annual percentage rate. Shop around for better rates before you borrow. If you have credit card debt, consider a balance transfer card with a 0% introductory period to get rid of high APRs. Even if it ends up being cheaper to borrow in the long run, remember that lower interest rates also lead to lower returns on savings accounts.

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