The Fed cuts rates again, but Trump clouds the outlook for 2025

Two days after fierce Fed critic and former President Donald Trump won his second trip to the White House, the Federal Reserve stayed the course and cut rates for the second time since September.

On Thursday, the Federal Reserve cut the fed funds rate by a quarter of a percentage point to bring short-term interest rates back to a set range of 4.5% to 4.75%. The interest rate cut follows a half-point reduction September 18.

The short-term interest rate is used by banks for overnight lending, but plays a major role in influencing many interest rates that consumers and businesses across the economy pay to borrow, including credit card rates.

Many economists still expect a further quarter-point cut in December. But the outlook for 2025 could be bleaker as the Fed will keep a close eye on inflation and the jobs picture.

Cox Automotive Chief Economist Jonathan Smoke said the Fed’s path beyond its upcoming Dec. 18 meeting is “a little less certain,” but he maintains it is still possible for the Fed to eventually cut the federal funds rate to a certain range of 3.25% to 3.5% after further rate cuts in 2025.

“Much will depend on how the economy develops and how policy actions can impact inflation,” Smoke said.

The economy is expected to continue growing, he said, and may see more momentum in the fourth quarter and early next year as the Nov. 5 election uncertainty has subsided.

“The next few weeks will tell,” Smoke said.

Consumers could see lower interest rates in the next six months, he said.

Still, mortgage rates could remain high. The mortgage with a fixed rate of 30 years average 6.79% on Thursday, according to the latest data from Freddie Mac’s latest primary mortgage market survey. The good news is that the average is lower than the weekly average of 7.5% a year ago on November 9, 2023.

But we’re talking about an increase from the recent low of 6.08% reached in the September 26 survey.

Mortgage rates — which do not move with changes in the federal funds rate — have risen in recent weeks on several headwinds, including the outlook for the economy and the 2024 presidential election.

Market watchers and economists say bond yields have been rising on concerns that Trump’s proposed tariff, immigration and tax policies would fuel inflation, leaving little room for the Fed to keep rates low.

“As investors worry about higher inflation that could be caused by a Trump presidency, they will continue to demand higher yields on 10-year Treasury bonds,” said Jacob Channel, senior economist at LendingTree.

Interest rates may not fall aggressively in 2025, experts say, if the Trump administration makes policy changes that fuel inflation and thwart the Fed.

“A key risk is that higher inflation will force the Fed to become aggressive again,” Smoke said.

On Wednesday, Smoke remained optimistic that the country “will see policy changes that represent more of a middle ground that are better for the overall economy than the extremes feared.”

Sales of cars and trucks benefit from lower rates

Right now, Smoke says, the economy is seeing a wave of positive momentum in the near term, especially during the key spring sales season for cars and trucks.

Consumers can expect lower auto loan rates in the spring, he said, perhaps averaging around 8% for new car and truck loans that consumers will qualify for next year. While that’s much better than the nearly 10% in 2024, it’s higher than the average low of 5.8% in 2021.

Currently, the average interest rate on new car loans that consumers receive is 9.3%. Well-qualified borrowers will receive lower rates and can be expected to see even more low-rate offers. Some lenders may be more willing to get aggressive on interest rates in the coming weeks, according to Smoke.

“I have no doubt that high rates – and limited affordability – will hold back new sales in 2024,” Smoke said. “It was the first year without supply constraints and with a positive economy in which we failed to exceed the long-term sales average.”

The car and truck market is still limited by affordability and supply of available vehicles, according to Smoke, so automakers won’t see huge growth. “That said, I continue to believe that 2025 will be the best year for the new vehicle market since 2019,” Smoke said.

Consumers hate high prices and inflation

The risk, as some economists see, is that the Fed will have to reverse course and end its rate-cutting cycle sometime later next year.

Many Trump supporters consistently blamed the Biden administration — and presidential candidate Vice President Kamala Harris — for inflation, which spiraled out of control and peaked in the second half of 2022.

The US economy is doing well, but many consumers are not studying the GDP numbers. They stare at the numbers on receipts from the gas station or the supermarket.

I spoke to a Trump voter this week who said his family of four was now paying $400 a week for groceries, while they used to pay $200 or $220 before inflation took off.

Vasilios Raspoptsis, 33, of Warren, told me that he and his wife can’t afford to pay thousands of dollars for child care, so he is now a stay-at-home dad with two children, ages 3 and 4. His wife works in billing at a waste management company. He said he voted for Barack Obama in 2012 and then voted for Trump in 2016, 2020 and now in 2024.

Trump’s plans could lead to inflation

Still, economists warn that many of Trump’s 2024 campaign promises could ultimately fuel inflation, not stop it.

“Many of Trump’s key policy proposals – such as universal tariffs and mass deportations – are likely to cause inflation to rise again,” Channel of LendingTree said.

“If this happens, the Fed may have no choice but to reverse course and prematurely end the current rate-cutting cycle.”

Wall Street is looking forward to making deals

The stock market has broken one record after another since the economy recovered from the COVID-19 pandemic.

The Dow Jones Industrial Average is up nearly 54% from the close on Election Day 2020 through the close on Election Day 2024.

And then it went up even further.

Wall Street virtually threw a party over Trump’s victory Wednesday, with the Dow Jones gaining 1,508.05 points, or 3.57%, on the day after the election, setting a new record of 43,729.93 points.

Investors see more opportunities for mergers and acquisitions, tax cuts, higher corporate profits and lighter regulations.

However, economists warn that the economy could become weaker than some might expect under a Trump administration.

“The risk of both a resurgence of inflation and an outright recession will be greater, and both car and home sales are likely to remain weak as a result,” Channel said Thursday morning.

One Trump proposal regarding auto loans, which was announced at the Detroit Economic Club on October 10 could boost car sales if implemented.

“Many of Trump’s tax proposals will be controversial,” said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.

But Trump’s proposal to allow a tax deduction for auto loan interest could be more attractive overall and fit into the current federal tax structure, Luscombe said. Such a change should be part of the tax code changes approved by Congress.

“A deduction already exists for mortgage interest, the most expensive purchase for many Americans,” Luscombe said. “So a deduction for interest on car loans, often the second most expensive purchase, could easily fit the bill.”

Being able to deduct car loan interest from your federal taxes could encourage some consumers to take out expensive car loans. But Channel added that “this probably won’t change much for the majority of people who don’t itemize their taxes.”

Trump, of course, has a lot to say about the Fed. He is known for his public attacks on Fed Chair Jerome Powell and former Fed Chair Janet Yellen.

The Federal Reserve operates independently in setting short-term interest rates and does not follow directions from Congress, the president, or political campaigns. Powell has repeatedly emphasized that the Fed’s actions are based on economic data.

For example, during his campaign earlier in August, Trump suggested that the president should be able to influence the Fed when it comes to monetary policy, such as interest rates.

Trump spoke at a press conference at his Mar-a-Lago estate in Florida in early August and was quoted by The Hill, He says he believes “strongly” that the “president should at least have (a) voice” in the Fed’s monetary policy, such as the direction of interest rates.

Trump defended his criticism of the Fed, but seemed to back off somewhat in a later interview with Bloomberg, where he was quoted saying, “I think it’s fine for a president to talk. It doesn’t mean they have to listen.” Trump noted that he has “very good instincts” about tariffs because he has made a lot of money.

“That doesn’t mean I have a say, but it does mean I should have the right to talk about it just like anyone else.”

Trump will choose the next chairman of the Federal Reserve. But Powell said this summer that he planned to serve out his full term as central bank head until May 15, 2026.

On Thursday, Powell spoke at a news conference where a reporter asked the question: If Trump asked you to leave, would you go? Powell simply said, “No.”

In response to another reporter’s question, Powell said it is not legal for a president to fire a Fed chairman. Powell declined to answer another question asking whether he had concerns about the Fed’s independence during the Trump administration.

Powell was appointed to the Fed Board of Governors by then-President Barack Obama.

Trump tapped Powell to lead the central bank from 2018. At that point, Trump broke with precedent and denied then-Fed Chair Janet Yellen a second term. Powell was confirmed for a second term in 2022.

The Fed’s rate cut made sense Thursday because high interest rates are no longer necessary to control runaway inflation. Many consumers could certainly use an interest rate cut, but they clearly shouldn’t count on a return to the super-low rates we saw in 2021.

(This story has been updated with new information and to correct a headline.)

Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X @tomorrow.