The Fed cuts rates, but the path ahead is less clear

Federal Reserve officials cut interest rates Thursday, their second reduction of 2024 and the latest sign that policymakers believe that inflation is finally coming under control.

The Fed's move comes just days after Americans elected Donald Trump as their next president, and at a moment when the U.S. economy stands on the brink of change.

Growth had already been stronger than many economists had expected. And now, the policies Trump pledged from the campaign trail could shake up the economy and risk further inflation - though it is unclear which ones will come to fruition.

Jerome Powell, the Fed chair, suggested during a news conference Thursday afternoon that officials would be watching economic data as they weighed whether to make a final rate cut of 2024 at their next meeting in December.

He also emphasized - repeatedly - that the Fed's immediate path would not be affected by Trump's win and policy plans.

"In the near term, the election will have no effects on our policy decisions," Powell said, adding that it was impossible at such an "early stage" to model what the policies would be or what they would mean for the economy. "We don't guess, we don't speculate, and we don't assume."

The takeaway was that, faced with a complicated and changing economic and political backdrop, the Fed is avoiding giving a clear signal of what comes next. Instead, it is waiting, watching and feeling its way forward - and trying to set policy in a way that keeps the labor market strong without allowing inflation to reignite.

America's central bank is independent of the White House, which means that it sets interest rates without needing approval from the president or administration. To protect that independence, Fed officials try to avoid talking about politics directly.

But that reticence has not historically been enough to keep the Fed out of the political crosshairs when it comes to Trump.

Trump made a practice of criticizing Fed officials for keeping interest rates too high during his earlier term in the White House, and at one point flirted with trying to fire Powell. While Trump has said that he would not try to dismiss the Fed chair again, there has been speculation in recent days about whether he might ask the Fed chief to resign.

When asked Thursday if he would step down if asked to do so, Powell answered with a simple "no."

Even if they want to remain outside the political fray, Fed officials may need to consider how a Trump presidency might change the economic outlook in the months and years ahead. White House policy could be important to the outcome of their two official goals: maintaining slow and stable inflation as well as a strong labor market.

The Fed has been making progress toward those targets in recent months.

Inflation jumped sharply starting in 2021 and peaked in 2022, but it has been moderating since. As of the latest report, it is nearly back to normal: September price increases came in at 2.1% overall, just above the Fed's 2% goal.

A "core" inflation index that strips out food and fuel to capture the underlying inflation trend remains slightly more elevated.

At the same time, the job market has been slowing. Companies continue to hire, but at a more muted pace than in 2022 and 2023, and the unemployment rate has nudged higher over the past year.

Given those developments, Fed officials began to cut interest rates with an unusually large half-point reduction in September. They also forecast at that meeting that they would make another half-point of rate cuts in 2024, followed by a full percentage point of reductions in 2025.

But while a December rate cut is possible, it is not guaranteed, a reality Powell underscored.

Recent data has left the Fed "feeling good about economic activity," Powell said, adding that "by December, we'll have more data."

A spate of economic data points over the last few weeks has suggested that the Fed need not rush. The jobless rate has stabilized, and consumer spending has been surprisingly strong, so the economy does not appear to be anywhere near the precipice of a painful crash.

"As we move ahead, we are prepared to adjust our assessments of the appropriate pace and destination" of interest rate moves, Powell said.

But in the longer term, Trump's election could complicate the Fed's policy path.

Economists widely think that the big tariff increases Trump proposed while campaigning - which could include across-the-board levies on all trading partners, and tariffs of 60% or more on Chinese goods - could lift prices.

And while trade conflicts did not lead to out-of-control inflation under Trump's first presidency, what he is proposing this time is more extensive. These tariffs would also come at a time when inflation has already been high. And they could come in conjunction with other White House policies, like tax cuts, that have the potential to add renewed fuel to price increases.

It is unclear exactly how much Trump's plans will change the economic picture, because much depends on how they are implemented. But investors started to bet on faster price increases and fewer Fed rate reductions as Trump's victory began to look more likely.

Powell said that there was not yet enough certainty for the Fed to even start to take Trump's policies into account as officials think about the outlook.

"We have a very large economy," Powell noted, and "the legislative process takes a lot of time."

Back in 2016, when Trump was first elected, Fed officials and staff members discussed the change at length at the December meeting following the election, a transcript from the gathering showed. The word "election" surfaced 72 times.

But officials back then clearly viewed the election as an input into the economic picture, not as a game-changer that required a more immediate reaction.

Powell implied that a gradual, contemplative reaction would be likely again this time around.

For now, the immediate question will be what pace of rate cuts is appropriate based on the way actual economic data is shaping up.

Officials don't want to cut rates too quickly into a humming economy, only to find that inflation heats back up. Nor do they want to leave rates so high for so long that they tank the labor market.

"You want to be careful," Powell said. "Meeting by meeting, we're going to be making our assessment of what the right path is."

Policymakers will release a fresh set of economic projections following their meeting in December. In those forecasts, officials will have to estimate how much they expect to lower interest rates next year.

When asked whether he thought the Fed was still likely to make a full percentage point of rate cuts, as officials predicted in September, Powell demurred.

"We're just going to have to see where the data lead," Powell said.

"We're going to move carefully as this goes on," he later added, "So that we can increase the chances that we get this right."

This article originally appeared in The New York Times.