The US Federal Reserve is cutting interest rates by another quarter point

The Federal Reserve cut its key interest rate by a quarter point on Wednesday – its third cut this year – but also signaled that it expects to cut rates more slowly next year than previously expected, with inflation still well above The central bank’s target is two percent.

The Fed’s 19 policymakers predicted they would cut their key interest rate by a quarter point just twice in 2025, while they had expected four rate cuts in September. Their new forecasts suggest consumers may not enjoy significantly lower interest rates on mortgages, auto loans, credit cards and other forms of borrowing next year.

Fed officials have emphasized that they are slowing their rate cuts as their key interest rate approaches a level that policymakers call “neutral” – the level that is believed to neither stimulate nor hinder the economy.

Wednesday’s forecasts suggest policymakers may believe they are not far from that level. Following the change on Wednesday, its key interest rate stands at 4.3 percent, after being cut significantly by half a percentage point in September and by a quarter point last month.

“I think a slower pace of (rate) cuts actually reflects both the higher inflation readings we’ve had this year and expectations that inflation will be higher in 2025,” Chairman Jerome Powell said at a news conference .

“We are approaching neutral interest rates, which is another reason to be cautious about further steps.”

“Despite this,” Powell said, “we still believe we are on track to make the cuts.”

In response to the cut, Loonie slips

In response to the cut on Wednesday afternoon, the Canadian loonie fell further against the U.S. dollar, which continues to outperform other currencies.

“Jerome Powell talked about a U.S. economy that is significantly outperforming not only domestic expectations but also those of the rest of the world,” said Karl Schamotta, chief market strategist at Corpay, a payments management company in Toronto.

“That means U.S. interest rates are high, and that makes U.S. markets the best place in the world to park money.”

Several other factors have driven the madman’s decline in recent months and years, including the end of a “supercycle” that led to high demand for Canadian energy, high household debt that curbed consumer spending, and Trump’s threat with a 25 percent tariff on Canadian goods.

With that, “you essentially have a lethal cocktail for the Canadian dollar,” Schamotta told CBC News. And the madman could sink “at least a few cents lower” if Trump carries out his threat.

That would hit the export sector hard. Consumer sentiment in Canada would decline and companies would further reduce investments, said Schamotta.

“All of this would mean that Canada would most likely fall into a recession.”

Still, Canadian exporters would be hurt if the loonie underperformed against the U.S. dollar, Schamotta said. A smaller correction could mean that some of these exports will be “put in a better position.”

“They will be able to sell cheaper exports to the world and they will be able to grow,” he said. “So this is something of a realignment process.”

High inflation remains and hiring momentum is slowing

This year’s Fed rate cuts marked a turnaround after more than two years of high interest rates that largely helped curb inflation but also made borrowing painfully expensive for American consumers.

But now the Fed faces a number of challenges as it seeks a “soft landing” of the economy, in which high interest rates manage to curb inflation without triggering a recession. The biggest reason is that inflation remains stubborn: According to the Fed’s preferred measure, annual “core inflation,” which excludes the most volatile categories, was 2.8 percent in October. That is still well above the central bank’s two percent target.

At the same time, the economy is growing strongly, suggesting that higher interest rates have not slowed it down significantly. As a result, some economists – and some Fed officials – have argued that lending rates should not be cut even further for fear of overheating the economy and reigniting inflation.

On the other hand, the pace of hiring has cooled significantly since the start of 2024, which could be a concern since one of the Fed’s missions is to achieve maximum employment.

“We don’t believe we need a further slowdown in the labor market to bring inflation below 2 percent,” Powell said at his news conference.

Although the unemployment rate is still low at 4.2 percent, it has increased by almost a full percentage point in the last two years. Concerns about rising unemployment contributed to the Fed’s decision in September to cut its key interest rate by half a percentage point more than usual.

Trump’s tariff threats increase uncertainty

In addition, US President-elect Donald Trump has proposed a series of tax cuts and a reduction in regulations that could boost overall growth. And his threatened tariffs and mass deportations could accelerate inflation.

Powell and other Fed officials said they would not be able to assess how Trump’s policies might affect the economy or their own interest rate decisions until more details were announced. Until then, the outcome of the presidential election has primarily increased economic uncertainty.

This was underscored by the Fed’s quarterly economic forecasts on Wednesday.

Policymakers now expect headline inflation, as measured by their preferred measure, to rise slightly from the current 2.3 percent to 2.5 percent by the end of 2025.

Officials also expect the unemployment rate to rise slightly by the end of next year, from the current 4.2 percent to a still-low 4.3 percent.