Fed cuts interest rates by a quarter of a point
The Federal Reserve cut interest rates by a quarter of a percentage point for the third time in a row in an effort to lower borrowing costs for consumers.
WASHINGTON – As consumers focus on affordability ahead of the holiday season, Federal Reserve Chairman Jerome Powell said he is hearing Americans’ concerns about rising costs “loud and clear.”
Still, the Federal Open Market Committee was divided, and on Dec. 10 ordered the benchmark federal funds rate cut by another quarter of a percentage point to a range of 3.5% to 3.75%. The aim is to prevent further cooling of the labor market. But lower borrowing costs could lead to higher spending, higher demand, and possibly higher prices.
“Affordability” has become the watchword of the moment, shaping a political movement and a centerpiece of President Donald Trump’s transcontinental career, which began on December 9th. Research suggests that deep-rooted concerns about affordability shape daily decision-making for many people. A poll from the Century Foundation, a progressive think tank shared exclusively with USA TODAY, found that some Americans are skipping medical care and meals and dipping into their savings to pay for basic necessities.
In a news conference after two days of central bank meetings, Powell said consumers are facing “very high” costs and that the Fed is “working hard” to make life more affordable for Americans.
“A lot of it is not the current rate of inflation. A lot of it is just embedded in the higher costs of higher inflation in 2022 and 2023,” Powell said, adding that annual inflation, excluding tariff costs, is already hovering around the Fed’s 2% target. “The best thing we can do is get inflation back to our 2% target. Our policy is aimed at that, but it’s also aimed at having a strong economy with rising real wages.”
Powell said December’s rate cut marks a shift from restrictive to neutral policy, meaning interest rates are no longer intended to slow or stimulate the economy.
Division continues as there is no risk-free path
Not everyone was in favor of the cuts. “There is no risk-free path” to policy, Powell said, a sentiment he shared in October.
“Different views on various labor market indicators, the impact of tariffs, and more have led to more negative votes than we’ve seen in decades,” Indeed economist Cory Stahl said in a note.
Stephen Milan, who President Trump recently appointed to the Fed board, continued to voice his opposition and supported a 0.5 point rate cut. In response to the quarter-point cut on Dec. 10, President Trump said the cut “could have been twice as large.”
Two other members, Austan Goolsby and Jeffrey Schmidt, wanted to keep interest rates on hold, warning that potential inflationary pressures from tariffs should not be ignored.
For Seema Shah, chief global strategist at Principal Asset Management, such opposition was not surprising.
“Given the lack of recent economic data and the wide disparity in estimates of the neutral rate, it is difficult to imagine the level of confidence in the economy that would lead to a unanimous Fed vote,” Shah said in a note.
How interest rate cuts affect your wallet
David Stubbs, chief investment strategist at AlphaCore Wealth Advisory, said the Fed’s quarter-point interest rate cut doesn’t mean much to Americans who want to reduce the cost of living.
He said the move won’t significantly change home affordability or lower housing costs, given that mortgages are driven by long-term interest rates, which are outside the Fed’s control.
“The housing market is facing very significant challenges, and I don’t know if a 25 basis point cut in the federal funds rate will make a big difference for people,” Powell said, adding that the U.S. is in short supply of housing and that moving will be expensive for people who took out low-interest mortgages during the pandemic.
Still, lower interest rates should mean lower borrowing costs. Stubbs said consumers with variable-rate debt, such as auto loans, are likely to see their interest rates fall. He added that savers could receive lower interest rates on short-term bond investments.
The Fed’s decision is aimed at preventing further cooling of the job market, but Ryan Sweet, chief global economist at Oxford Economics, is not confident the Fed will be able to support the labor market “because of what’s bothering the labor market.”
“A rate cut is unlikely to significantly increase the employment rate, which has been depressed by overemployment, strong productivity growth, policy uncertainty, more people holding multiple jobs, and less immigration,” Sweet said in a note. “Monetary policy cannot solve many of these problems.”
What to expect from the Fed in 2026
The Fed’s dotplot, which maps what policymakers think interest rates will be in the future, shows that the median expectation among its members is for just one quarter-point rate cut in 2026.
But Bill Adams, Comerica Bank’s chief economist, said the December dotplot could reveal a “less than normal” outlook for interest rates for two reasons.
“First, they know less than usual about the current state of the economy because the government shutdown has delayed the release of economic data,” Adams said in a memo. “Second, the Fed’s guidance does not take into account how the Fed’s approach might change after Chairman Powell’s term ends in May.”
Nevertheless, Stubbs said the division of opinion among members suggests the hurdles for further rate cuts next year are high.
“These growing disagreements place a lot of focus on the next January meeting and the ability of a future Fed chair to garner support,” Bankrate financial analyst Stephen Cates said in a note.
Sweet added that he expects the Fed may want to hold off on changing the federal funds rate for a while, given the economic impact of this and the previous two rate cuts.
Contact Rachel Barber rbarber@usatoday.com X Follow her at @rachelbarber_
