The Federal Reserve cut interest rates by a quarter point on Thursday, following the US presidential election earlier this week. Chairman Jerome Powell also affirmed his commitment to serving out his term, which is expected to end in mid-2026, even if President-elect Donald Trump tries to fire him.

It’s the second rate cut since the central bank began cutting borrowing costs in September, although the latest cut is smaller. However, it is an additional relief from the high cost of credit cards, car loans and other debts.

Slower inflation and a shrinking labor market paved the way for Thursday’s decision.

More rate cuts are expected in 2025, though how many are up in the air due to the potential impact of Trump’s proposed policies, such as tax cuts, deregulation, stiff overall tariffs and mass deportations. The full scope of these plans, and when they would begin to impact the U.S. economy, is unclear.

For the Fed to continue tapering, it needs to see price pressures stay under control and some economists have described Trump’s economic agenda. as an “inflationist” to CNN.

Oxford Economics said in an analysis published on Wednesday that “the outlook for 2025 does not change appreciably” because it would take time for Trump’s policies to affect the economy, meaning more rate cuts on which officials projected in September could take place next year. . On the other hand, analysts at Nomura fully expect Trump to follow through on his plans quickly, predicting only a rate cut next year.

Most of Trump’s policies require approval from Congress, which would not be a difficult endeavor as Republicans have claimed control of the Senate and appear on track to capture the House as well. At some point, Fed officials will have to incorporate expected changes in fiscal policy into their official economic projections.

Powell on the implications of Trump’s election

The Fed will ultimately have to grapple with Trump’s economic agenda, which is expected to have far-reaching effects on growth, the labor market and inflation — whenever it takes hold.

Powell said that in the short term, the outcome of this year’s election “will have no effect on our policy decisions.” This is a nod to a widely expected interest rate cut next month.

William English, a former senior Fed adviser, told CNN that he expects Fed policymakers to go ahead with a quarter-point cut in December as borrowing costs still have a tight grip on the economy. That decision, of course, still depends on what future employment and inflation numbers show.

Powell said officials are following any proposed policies and economists are creating “an alternative simulation before that happens, just to keep trying to understand it.” He added that once something in Congress actually passes, those economic simulations are updated accordingly with even more data, helping officials form their baseline projections of the economy. Fed officials release economic projections every three months, with the next one coming in December.

As usual, Powell deflected reporters’ questions on political topics, such as what he learned about consumer attitudes from this week’s election results, but weighed in on Trump’s power over the Fed and his own future plans.

When asked if Trump has the power to fire him, Powell said flatly “No.” In a separate question asking whether he believed the US president had the power to demote him or any other Fed official to a leadership position, Powell said that was “not permitted by law”.

Powell looks at recent strong economic data

Powell said economic data since the September decision had been on the stronger side, including recent readings of the personal consumption expenditures price index, the Fed’s preferred gauge of inflation.

“The latest economic data has been strong and that is of course a great thing and very welcome,” Powell said. “But of course our mandate is maximum employment, price stability, and we believe that even with today’s reduction, policy is still restrictive. We understand that it is not possible to say exactly how restrictive it is yet.”

That’s a big reason why the Fed decided to cut rates further this week, even as the economy appears to be humming along. High interest rates are still keeping the economy in a tailspin, which poses a risk to the labor market.

Powell said “the economy is doing well” but acknowledged that Americans are still feeling sour from the lingering trauma of high inflation, even though it has improved considerably over the past two years. He said a prolonged period of rising real earnings could help turn their economic fortunes around.

He emphasized that officials are in no rush to return interest rates to the so-called neutral interest rate — a level of rates that neither stimulates nor dampens the economy. Since it’s clear Fed officials are in no rush to cut rates, that could mean the Fed will hold off a few times next year.

The Fed is watching these risks

Officials said in their latest policy statement on Thursday that the risk of labor market deterioration and the risk of inflation stagnating or reaccelerating are about the same magnitude now.

But in recent months, attention has turned more to the health of America’s labor market, which remains in decent shape but has clearly lost momentum over the past year.

Employers had a seasonally adjusted 7.4 million job openings in September, according to Labor Department data, down sharply from 9.3 million in the same month a year earlier, while the hiring rate fell to 3.5 % from 3.7% in the same period. The unemployment rate was 4.1% in October, up from 3.8% a year earlier (though still at a historic low). Workers’ claims for ongoing jobless benefits rose last week to the highest level since November 2021, a sign that it has become harder for jobless Americans to find work. Fed officials wrote in their statement that “since the beginning of the year, labor market conditions have generally eased.”

But there are also signs of a robust economy, which could raise the risk of inflation stagnating or even accelerating, undoing the Fed’s hard-fought progress to rein in price pressures.

The US economy expanded at a solid 2.8% annual rate in the third quarter, driven by strong consumer spending. Business investment also continued to support economic growth in the third quarter, according to recent government data.

On inflation, Powell said “we’re not declaring victory, obviously,” but noted that officials feel “the story is very consistent with inflation continuing to come down.”

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