Federal Reserve cuts its key interest rate amid post-election uncertainty

The U.S. Federal Reserve reduced its key interest rate by a quarter-point on Thursday, responding to the continued decline in inflation that had frustrated Americans and contributed to Donald Trump’s presidential victory this week. This follows September’s larger half-point cut and shows the Fed’s new focus on both supporting employment and managing inflation, which is now just slightly above their 2% target.

The reduction brings the Fed’s benchmark rate to around 4.6%, down from a four-decade peak of 5.3%. The Fed had maintained this high rate for over a year to combat the worst inflation in forty years. Since then, yearly inflation has dropped from its mid-2022 peak of 9.1% to a 3½-year low of 2.4% in September.

During a news conference, when asked about Trump’s election’s impact on Fed policy, Chair Jerome Powell stated that “in the near term, the election will have no effects on our (interest rate) decisions.”

However, Trump’s victory raises concerns about potential White House interference in Fed decisions. Trump has previously claimed he should have input in the Fed’s rate decisions, despite the Fed’s traditionally independent role in setting borrowing rates. During his previous presidency, Trump publicly criticised Powell when the Fed increased rates to fight inflation.

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When asked if he would step down at Trump’s request, Powell, who will have one year remaining in his second four-year term when Trump takes office, simply answered “No.” He added that Trump would not have the legal authority to fire or demote him in his view: it would “not be permitted under the law.”

The Fed’s latest policy statement noted that the “unemployment rate has moved up but remains low,” and while inflation has moved closer to the 2% target, it “remains somewhat elevated.” After their September rate cut – their first in over four years – Fed officials had projected additional quarter-point cuts in November and December, plus four more next year.

However, with the economy remaining strong and Wall Street expecting faster growth, larger budget deficits, and higher inflation under Trump’s presidency, further rate cuts may become less likely, though such cuts typically result in lower borrowing costs for consumers and businesses over time.