Fed Cuts Rates As Expected, but the Election May Change the Fed's Course Next Year

The Federal Open Market Committee's decision to cut interest rates a quarter-percent was widely expected, but what's less clear is what Fed Chair Jerome Powell will say at his press conference today at 2:30 p.m. ET.

Powell will likely have to field questions about this week's election and the potential impact a new administration's agenda could have on the economy.

President-elect Donald Trump and the Republican Party won a decisive election victory this week with promises of sweeping changes, including increased tariffs and lower taxes. 

The Fed had originally penciled in multiple rate cuts for 2025, with some committee members indicating interest rates could fall to 3% to 3.25% by the end of next year. That could change if tax cuts and tariffs reignite inflation, as some experts predict. However, it's also unclear what the potential long-term impact might be, since details are still sparse, according to Gisela Hoxha, a US economist with Citigroup.

"A 10 or 20% across-the-board tariff would have some inflationary impact," she said. "Maybe the Fed would go from cutting every meeting to maybe doing quarterly. So basically, just a much more gradual pace or even pausing."

The central bank made a splash in September when it reduced interest rates by a half-percent, the biggest single cut since 2008. That decision came after a three-year fight against soaring inflation, which peaked at 9.1% in 2022. As inflation approached the Fed's 2% goal this year, Powell said the committee was shifting its focus to bolster a softening job market by lowering interest rates.

A 0.25% interest rate cut won't make much of a difference on its own. But combined with September's cut and potentially more in the future, interest rates could finally fall enough to make borrowing more affordable. Experts say it's best to focus on creating your own solid financial plan rather than reacting to every potential change on the horizon.

Credit card APRs dipped slightly following the first rate cut and should go down further if the Fed continues reducing the federal funds rate. But credit card debt remains expensive, so it's best to take steps now to start paying off high-interest debt.

Meanwhile, savings rates on CDs and high-yield savings accounts have already started dropping and will likely decline more. It's best to lock in a higher interest rate now before another potential cut to maximize your earnings.

Mortgage rates dipped initially after September's rate cut but have surged back since. Experts expected rates to start falling next year with additional interest rate cuts, but volatility within the economy could put mortgage rates on an uncertain path.

We'll update this story after Fed Chair Jerome Powell's news conference at 2:30 p.m. ET.