Quote from Alex bobby on December 19, 2024, 10:43 AM

Federal Reserve Lowers Interest Rates but Signals Slower Path to 2% Inflation

The Federal Reserve announced on Wednesday a slight reduction in its benchmark interest rate but hinted at a slower-than-expected path toward achieving its 2% inflation target. The move underscores the ongoing balancing act between controlling inflation and fostering economic growth.

Rate Reduction and Future Projections

The Federal Open Market Committee (FOMC) reduced the federal funds rate by 0.25 percentage points, setting the target range at 4.25% to 4.5%. This rate serves as a benchmark for various loans, including mortgages and credit cards. While the reduction was widely anticipated, the Fed’s updated projections revealed an extended timeline for meeting its inflation goal.

Previously, the FOMC projected hitting the 2% inflation target by 2026. However, the latest forecast pushes that milestone to 2027. Additionally, the committee adjusted its estimate of the “neutral” interest rate — one that neither stimulates nor restricts economic growth — to a range of 2.8% to 3.6%, up slightly from September's 2.5% to 3.5%.

Powell’s Optimistic Outlook

Fed Chair Jerome Powell expressed optimism about the U.S. economy during a press conference, highlighting its strong performance compared to global peers. Powell noted that the rate cut was influenced by signs of a softening labor market but emphasized that the current rate remains “meaningfully restrictive.”

“The U.S. economy is just performing very, very well — substantially better than our global peer group,” Powell stated. “There’s no reason to think a downturn is any more likely than it usually is.” He added that the Fed remains committed to its dual mandate of maintaining price stability and maximizing employment.

Impact of the Trump Administration’s Policies

Economic analysts noted that the Fed’s cautious approach might be influenced by uncertainties surrounding the incoming Trump administration’s policies. Mark Hamrick, senior economic analyst at BankRate.com, suggested that Trump’s plans to boost economic growth and implement tariffs could have inflationary effects.

“There’s heightened uncertainty ahead given the ambitions of the Trump administration,” Hamrick said. He warned that rates might stay elevated longer than previously expected, delaying a return to pre-pandemic levels.

Kenneth N. Kuttner, an economics professor and former Federal Reserve Bank of New York official, echoed this sentiment, noting that the FOMC’s revised projections reflect a reassessment of inflation and neutral rates in light of these uncertainties.

Public Perception vs. Economic Reality

Despite tangible improvements in economic indicators, public sentiment about the economy remains sour. An Associated Press-NORC poll found that two-thirds of Americans describe the economy as poor, even as inflation has fallen below 3%, unemployment remains near historic lows, and wages have outpaced inflation since late 2023.

Political alignment appears to heavily influence economic perceptions. While 51% of Democrats view the economy positively, only 16% of Republicans share that sentiment. However, in the wake of Trump’s election victory, 69% of Republicans anticipate economic improvement in 2025, compared to only 11% of Democrats.

Presidential Influence and Economic Challenges

Both outgoing President Joe Biden and President-elect Donald Trump have acknowledged the limits of presidential power in directly influencing economic conditions. Biden, reflecting on his term, highlighted his administration’s efforts to rebuild the economy after the pandemic but admitted that many initiatives would take years to show full results.

“We knew in the beginning this wasn’t going to come to fruition in my administration,” Biden said at the Brookings Institution. “It takes time to get this done, but watch two, four, six, eight, 10 years from now.”

Trump, on the other hand, has made bold promises to lower consumer prices but also acknowledged the difficulty of reversing inflationary trends.

Looking Ahead

The Federal Reserve’s latest decision underscores its cautious approach as it navigates economic uncertainty. While the slight rate reduction provides relief to borrowers, the extended timeline for achieving 2% inflation signals that restrictive monetary policy will remain in place for the foreseeable future.

As Americans grapple with conflicting economic realities and perceptions, the incoming administration will face the dual challenge of addressing public discontent while fostering sustainable growth in a complex economic landscape.