Federal Reserve made a 3rd consecutive rate cut today. Here's how it will impact your money.
The Federal Reserve today made its final interest rate decision of 2024, capping a year during which the central bank provided some financial relief to inflation-weary borrowers in September by ushering in its first rate reduction in four years.
On Dec. 18, the Federal Reserve made its third consecutive cut of 2024, reducing the federal funds rate by 0.25 percentage points. Yet the Fed also projected a slower pace of cuts in 2025, a move that had been expected by economists given the nation's still-sticky inflation rate and some of President-elect Donald Trump's proposed policies, which, if enacted, could prove inflationary.
The Federal Reserve has been battling inflation since March 2022, when it began ratcheting up rates to cool the economy, eventually pushing its benchmark rate to its highest level in 23 years. While inflation has moderated considerably since then, November's Consumer Price Index rose 2.7%, outpacing the Fed's goal of driving down inflation to a 2% annual rate.
That signals the battle against inflation isn't yet over, though the November inflation report was in line with economists' expectations. At the same time, the unemployment rate has inched higher this year, sparking concerns from the Fed about weaknesses in the labor market, and helping open the door to its recent rate reductions, noted one economist.
"Higher for longer is the mantra headed into 2025," said Greg McBride, chief financial analyst at Bankrate, in an email. "The Fed's quarterly projections indicate a common expectation of just two interest rate cuts for next year, a change of thinking from September when the median expectation was four rate cuts."
What was the Fed rate decision today?
The Fed cut its federal funds rate — the interest rate banks charge each other for short-term loans — by 0.25 percentage points, lowered the rate to a range of 4.25% to 4.5%, down from its previous target range of 4.5% to 4.75%.
That marks the Fed's third consecutive rate cut this year, which kicked off with a jumbo 0.5 percentage point reduction in September, followed by a 0.25 percentage point cut at its November meeting. With today's cut, the Fed has lowered rates by a full percentage point since September.
How will another rate cut impact my money?
Any reduction in the federal funds rate could ease borrowing costs for millions of Americans. But a 0.25 percentage point cut isn't likely to make that much of a difference, with LendingTree chief credit analyst Matt Schulz noting that it "may knock a dollar or two off your monthly debt payment."
"Another rate cut is welcome news at the end of a chaotic year, but it ultimately doesn't amount to much for those with debt," Schulz said.
Still, new APR rates on credit cards have declined to 24.43% from 24.92% in September, according to LendingTree data. Loan rates for other products, such as home equity lines of credit, have also declined.
Despite the rate cuts, mortgage rates haven't budged much and continue to hover near 20-year highs, leaving many would-be homebuyers disappointed. While the Fed's benchmark rate influences home borrowing costs, mortgages are also impacted by broader economic trends and changes in the yield for the U.S. 10-year Treasury bond.
"Going forward, mortgage rates will likely continue to fluctuate on a week-to-week basis and it's impossible to say for certain where they'll end up," LendingTree's Channel said.
What's going on with inflation and the economy?
Inflation, or the rate at which prices for goods and services change over time, has cooled since it reached a 40-year peak of 9.1% in June 2022.
The Fed began pushing its benchmark rate higher in 2022 in order to dampen economic demand and tame inflation. But while inflation has eased since its 2022 peak, prices for many products and services remain considerably higher than they were before the pandemic.
And prices are likely to stay high unless there's a period of deflation, which typically only happens during a steep economic downturn, such as a recession.
That has left many Americans feeling financially tapped out, with millions taking their frustrations to the ballot box last month and voting for Trump's economic vision of ending "the inflation nightmare."
How might Trump's economic plans impact the Fed?
While Trump has vowed to tackle rising prices, some of his policies could prove to be inflationary, according to Wall Street economists. For instance, Trump last month unveiled plans to place a 25% tariff on all imports from Mexico and Canada on his inauguration day, January 20.
The president-elect also said he intends to levy an additional 10% fee on all imports from China.
But tariffs are essentially consumption taxes that are most often paid by consumers. In other words, American shoppers could end up paying more for everything from avocados imported from Mexico to TV sets manufactured in China.
Because of the potential for inflation to tick higher in 2025 if Trump enacts widespread tariffs, many economists expect the Fed to slow or pause in its rate decisions next year in a wait-and-see approach.
"Fed officials might prefer to be cautious in light of uncertainty about the new administration's policies, especially possible tariff increases," noted Goldman Sachs economists in a Dec. 15 research report.
Will the Federal Reserve cut rates in 2025?
The Fed expects to continue cutting rates next year, although it is now penciling in two rate cuts, down from the four it had forecast in September.
At his Wednesday press conference, Powell could "reiterate the familiar metaphor of moving slowly in a dark room full of objects to justify a potential rate cut 'skip' at the January meeting," EY chief economist Gregory Daco said in an email.
When is the first FOMC meeting of 2025?
The first FOMC meeting next year is scheduled for Jan. 28-29, with the rate decision set for Jan. 29.
That means the first rate decision of 2025 will occur after Trump's inauguration on Jan. 20, which means the Fed at that point might have more information about the next president's plans to enact tariffs or make other economic changes, such as his pledge to usher in more tax cuts.
