The Fed is set to cut its benchmark rate, but consumers might not benefit anytime soon. Here’s why

U.S. consumers may only feel slight relief from still high borrowing costs.

Federal Reserve officials on Wednesday will likely signal a slower pace of interest rate cuts next year compared with the past few months, which would mean that Americans might enjoy only slight relief from still-high borrowing costs for mortgages, auto loans and credit cards.

The Fed is set to announce a quarter-point cut to its benchmark rate, from about 4.6% to roughly 4.3%. The latest move would follow a larger-than-usual half-point rate cut in September and a quarter-point reduction in November.

Wednesday’s meeting, though, could mark a shift to a new phase in the Fed’s policies: Instead of a rate cut at each meeting, the Fed is more likely to cut at every other meeting—at most. The central bank’s policymakers may signal that they expect to reduce their key rate just two or three times in 2025, rather than the four rate cuts they had envisioned three months ago.

So far, the Fed has explained its moves by describing them as a “recalibration” of the ultra-high rates that were intended to tame inflation, which reached a four-decade high in 2022. With inflation now much lower—at 2.3% in October, according to the Fed’s preferred gauge, down from a peak of 7.2% in June 2022—many Fed officials argue that interest rates don’t need to be so high.

But inflation has remained stuck above the Fed’s 2% target in recent months while the economy has continued to grow briskly. On Tuesday, the government’s monthly report on retail sales showed that Americans, particularly those with higher incomes, are still willing to spend freely. To some analysts, those trends raise the risk that further rate cuts could deliver an excessively strong boost to the economy and, in doing so, keep inflation elevated.

On top of that, President-elect Donald Trump has proposed a range of tax cuts—on Social Security benefits, tipped income and overtime income—as well as a scaling-back of regulations. Collectively, these moves could stimulate growth. At the same time, Trump has threatened to impose a variety of tariffs and to seek mass deportations of migrants, which could accelerate inflation.

Chair Jerome Powell and other Fed officials have said they won’t be able to assess how Trump’s policies might affect the economy or their own rate decisions until more details are made available and it becomes clearer how likely it is that the president-elect’s proposals will actually be enacted. Until then, the outcome of the presidential election has mostly heightened the uncertainty surrounding the economy.

Either way, it appears unlikely that Americans will enjoy much lower borrowing costs anytime soon. The average 30-year mortgage rate was 6.6% last week, according to mortgage giant Freddie Mac, below the peak of 7.8% reached in October 2023. But the roughly 3% mortgage rates that existed for nearly a decade before the pandemic aren’t going to return in the foreseeable future.
Fed officials have underscored that they are slowing their rate reductions as their benchmark rate nears a level that policymakers refer to as “neutral”—the level that neither spurs nor hinders the economy.

“Growth is definitely stronger than we thought, and inflation is coming in a little higher,” Powell said recently. “So the good news is, we can afford to be a little more cautious as we try to find neutral.”

Most other central banks around the world are also cutting their benchmark rates. Last week, the European Central Bank lowered its key rate for the fourth time this year to 3% from 3.25%, as inflation in the 20 countries that use the euro has fallen to 2.3% from a peak of 10.6% in late 2022.