The US Federal Reserve cut its key interest rate on Wednesday by a quarter-point – its third cut this year – but also signaled it expects to cut rates next year less than previously thought, as inflation remains above the central bank's 2 percent target. target.
The Fed's 19 policymakers have estimated they will cut their benchmark rate just twice a quarter by 2025, down from their September estimate of four rate cuts. Their new projections suggest that consumers may not enjoy the lowest rates next year for mortgages, auto loans, credit cards and other forms of borrowing.
Fed officials have emphasized that they are reducing their rate cuts as their stance approaches what policymakers call “neutral” – a level that is not thought to stimulate or stifle the economy.
Wednesday's projections suggest that policymakers may think they are not too far from that level. Their rate stands at 4.3 percent after Wednesday's move, which follows a rate cut in September and a quarter cut last month.
“I think it's a little slow [rate] The cuts really reflect both the high inflation figures we've had this year and the expectation that inflation will be higher” in 2025, chairman Jerome Powell said at a news conference.
“We are close to neutrality, which is another reason to be aware of other moves.
“However,” said Powell, “we see ourselves still on the cutting edge.”
Loonie slides in response to the cut
The Canadian loonie fell sharply against the US dollar – which continues to outperform other currencies – due to Wednesday afternoon's reduction.
“Jerome Powell was talking about a US economy that is clearly not meeting expectations not only domestically, but globally,” said Karl Schamotta, chief market strategist at Corpay, a payments management company in Toronto.
“That means US interest rates are higher, and that makes US markets the best place in the world to park money.”
Many other factors have contributed to the loonie's decline over the past few months and years, including the end of the “supercycle” that saw high demand for Canadian energy, as well as high household debt that reduced consumer spending and Trump's threat of a 25 percent tariff. in Canadian goods.
With that, “you have a lethal cocktail for the Canadian dollar,” Schamotta told CBC News. And the loonie could sink “at least a few cents” if Trump goes through with his threat.
That will hit the export sector hard. Consumer sentiment in Canada will sink, and businesses will pull back on investment, Schamotta said.
“All of that would mean that Canada would go down a lot.”
However, Canadian exporters are hurt when the loonie does too much against the US dollar, said Schamotta. A lower adjustment would mean that some of these exports would be “better placed.”
“They will be able to sell cheap goods to foreign countries, they will be able to grow,” he said. “So this is a rebalancing process.”
High inflation continues, the pace of hiring is slowing
The Fed's rate cuts this year marked a reversal after more than two years of high rates, which have helped curb inflation but also made borrowing painfully expensive for American consumers.
But now, the Fed is facing a variety of challenges as it seeks to complete a “slow taper” in the economy, where higher rates can curb inflation without causing a recession. Chief among them is that inflation remains stubborn: According to the Fed's preferred gauge, annual “core” inflation, which excludes the most volatile categories, was 2.8 percent in October. That is still above the central bank's two percent target.
At the same time, the economy is growing rapidly, which suggests that high prices have not hindered it much. Because of this, some economists – and some Fed officials – have argued that lending rates should not be lowered too much for fear of overheating the economy and inflation.
On the other hand, the pace of hiring has cooled significantly since the start of 2024, which is a potential concern because one of the Fed's mandates is to achieve higher hiring.
“We don't think we need more cooling in the labor market to get inflation below 2 percent,” Powell said at his news conference.
Although still low at 4.2 percent, the unemployment rate has risen by nearly a full percentage point over the past two years. Concerns about rising unemployment contributed to the Fed's decision in September to cut its key rate by a larger-than-usual basis.
Trump's tariff threats increase uncertainty
In addition, US president-elect Donald Trump has proposed tax cuts and deregulation that could spur growth. And his threatened rates and mass deportations could accelerate inflation.
Powell and other Fed officials said they could not assess how Trump's policies would affect the economy or their own rate decisions until more information was available. Until then, the results of the presidential election have greatly increased economic uncertainty.
That was underscored by the Fed's quarterly economic projections released on Wednesday.
Policymakers now expect headline inflation, as measured by their preferred gauge, to rise slightly from 2.3 percent now to 2.5 percent by the end of 2025.
Officials also expect the unemployment rate to rise by the end of next year, from 4.2 percent now to 4.3 percent.
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