Fed makes new interest rate cut but won’t speculate on possible economic changes under Trump administration

Following through on a move telegraphed well ahead of its two-day policy meeting this week, the Federal Reserve reduced its benchmark federal funds rate by .25%, following up on a 0.5% cut assessed at its last meeting in September.
The decision by the Fed’s Open Market Committee lowers the monetary body’s intra-bank overnight lending rate to the 4.5% to 4.75% range. Before the September reduction, the first in four years, the Fed’s rate had stood at 5.25% to 5.5% since last summer and was the highest in 23 years after a series of 11 straight increases levied earlier by the monetary body in its efforts to quash inflation.
The Fed, which is guided by its dual Congressional mandate of maintaining maximum employment alongside price stability, switched gears this fall as U.S. inflation eased closer to the body’s target of 2%, backing off the more restrictive monetary policy stance in an effort to bolster a slowing jobs market.
At a press conference Thursday afternoon following the conclusion of its meeting, Federal Reserve Chairman Jerome Powell noted recent economic reporting reflects a positive U.S. economic climate, though one in which housing-related costs remain an outlier amid costs for other consumer goods and services that are increasing at a much lower rate since inflation peaked at 7.1% in mid-2022.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” Powell said. “GDP rose at an annual rate of 2.8% in the third quarter, about the same pace as in the second quarter. Growth of consumer spending has remained resilient. In contrast, activity in the housing sector has been weak. In the labor market, conditions remain solid. Payroll jobs gains have slowed from earlier in the year, averaging 104,000 a month over the past three months. This figure would have been somewhat higher if not for the effect of labor strikes and hurricanes in October.”
While Powell was asked repeatedly to offer a weigh-in on how the U.S. economy, and the Fed’s policy stance moving forward, would be impacted by the outcome of Tuesday’s presidential election, the Fed chairman noted no policy changes have yet been made and refused to speculate about potential future actions by President-elect Donald Trump’s administration.
“In the near-term, the election will have no effects on our policy decisions,” Powell said. “Here, we don’t know what the timing and substance of any policy changes will be. We therefore don’t know what the effects on the economy will be. We don’t guess, we don’t speculate and we don’t assume.”
While Powell, who joined the Federal Reserve in 2012, was elevated to the chairman’s position in 2018 by then-President Trump, the former president has been a critic of both the Fed’s policy decisions and Powell’s leadership. In response to one reporter’s question on Thursday about whether he would step down from his chairmanship if asked by Trump, Powell responded “no” and later said a sitting president is “not permitted under the law” to order personnel changes at the Fed outside its Congressionally-dictated process. Powell was renominated for the chairmanship by President Joe Biden in 2022 and later approved by the U.S. Senate. Powell’s current term runs through 2026.
Many economists are expecting a third straight interest rate cut at the Fed’s final meeting of the year in December, but Powell said the monetary body was not on a pre-set path and would evaluate a potential additional cut, or pause on rate adjustments, based on the most current data at that time.
While overall U.S. economic activity remains robust, and the Fed’s preferred inflation reading came in at 2.1% in September, the interest rate reduction hasn’t had its typical impact on mortgage lending rates, which have been moving up steadily since the cut.
The latest data from Freddie Mac, released Thursday, finds the average interest rate on a 30-year fixed-rate mortgage is 6.79%, up 0.07% in the last week and on a six-week streak of upticks.
“Mortgage rates continued to inch up this week, reaching 6.79 percent,” said Sam Khater, Freddie Mac’s Chief Economist, in a Thursday press release. “It is clear purchase demand is very sensitive to mortgage rates in the current market environment. As soon as rates began to rise in early October, purchase applications fell and over the last month have declined 10 percent.”
Mortgage rates are impacted by changes the Fed makes to its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution’s total deposits — but don’t necessarily move up in tandem with rate increases. Sometimes, as has been the case in recent weeks, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which in turn is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic and were hovering around 2% in late 2021, the rates tracked up alongside the Fed’s series of 11 hikes to its federal funds rate.
Following the Fed’s rate cut decision in September, yields on 10-year Treasury notes have headed up, an escalation running counter to typical expectations but one that economists say is driven by a slew of other indicators that reflect a robust U.S. economy.
The factors helping boost yield rates on long-term federal bonds include the ongoing downward trend in U.S. inflation rates, consumer spending (which drives two-thirds of the U.S. economy) that remains high, overall GDP growth and a jobs sector that has shown surprising resilience.