President Trump likely won't be happy about this: On Wednesday, the Federal Reserve announced another cut to a key interest rate, the overnight borrowing rate, by a quarter-point. This puts that key rate at 3.5 to 3.75 percent. The Fed passed the cut by a 9-3 vote.
A Federal Reserve split over where its priorities should lie cut its key interest rate Wednesday, but signaled a tougher road ahead for further reductions.
Fulfilling expectations of a “hawkish cut,” the central bank’s Federal Open Market Committee lowered its key overnight borrowing rate by a quarter percentage point, putting it in a range between 3.5%-3.75%.
The overnight borrowing rate is the interest rate at which depository institutions (like banks) lend or borrow funds from each other overnight to maintain reserve balances. Most countries' central banks have a version of this rate; in the United States, it is usually taken to mean the Effective Federal Funds Rate (EFFR), which is a volume-weighted median of actual overnight loans. This can have a great effect on interest rates on other transactions, from credit cards to mortgages.
The Fed, in this matter, has been largely resisting President Trump's repeated call for more drastic cuts. Furthermore, the Fed is now signaling some reluctance to consider more changes, citing worries about inflation.
However, the move carried caution flags about where policy is headed from here and featured “no” votes from three members, which hasn’t happened since September 2019.
The 9-3 vote again featured hawkish and dovish dissents – Governor Stephen Miran favored a steeper half-point reduction while regional presidents Jeffrey Schmid of Kansas City and Austan Goolsbee of Chicago backed holding the line. In Fed parlance, hawks are generally more concerned about inflation and favor higher rates while doves focus on supporting the labor market and want lower rates.
This is all pretty arcane stuff, but it's no surprise that the inflation hawks favored no cut at all. Some of us older, grayer types remember the Great Inflation that lasted from 1965 to 1982, and how the Reagan administration finally pulled that economic calamity's teeth by hiking up interest rates and leaving them there until inflation cooled; it wasn't easy and it wasn't fun, but it did work, and inflation has been dealt with by the Fed in this manner ever since.
But today's inflation rate is already reducing, and it's not a patch on the 1965-1982 mess.
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This may, however, be the last interest rate cut for some time to come.
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement said.
When the language was used in December 2024, it signaled that the committee likely was done cutting for the time being. The FOMC then did not approve any reductions until the September meeting.
It's an easy guess where President Trump will land on this. The president has been very vocal about the perceived need for cutting interest rates further and faster than the Fed has been willing to do. The president does have some leverage on this matter, but for the time being, it looks like he's going to have to accept another quarter-point cut.
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