Days before the presidential election, the Federal Reserve is expected to cut interest rates for the second time this year, moving its benchmark rate to around 4.6%. Despite an unpredictable election outcome that could impact future economic policy, economists anticipate another quarter-point cut as inflation remains low, a stark contrast to the inflation spike of 2022 that prompted 11 rate hikes.
Republican candidate Donald Trump’s policy proposals—such as imposing high tariffs and potential moves to influence Fed rate decisions—pose a unique uncertainty for the central bank. Some economists warn that these measures could drive inflation higher, possibly stalling or reversing rate cuts to avoid overheating the economy.
The upcoming Fed meeting is widely expected to result in a rate cut, reflecting Fed Chair Jerome Powell’s strategy to adapt to the declining inflation environment. This reduction follows a September cut, aiming to ease borrowing costs as inflation continues to align with the Fed’s 2% target. With inflation at 2.4% in September, the need for restrictive high rates has diminished, according to Powell and key Fed officials.
“We implemented restrictions because inflation was elevated,” noted Claudia Sahm, chief economist at New Century Advisors. “That reason is no longer applicable.”
Economists are divided on how far rates should drop. While the Fed’s “neutral” rate—where growth is neither stunted nor stimulated—remains uncertain, Powell and the Fed plan to monitor economic responses to each rate cut to find that balance.
