Experts say the Federal Reserve will likely cut rates next week. But what’s next?

After nearly two years of high interest rates, the Federal Reserve is expected to cut rates for the third time this year at Wednesday’s Federal Open Market Committee meeting.

The Federal Reserve’s monetary policy has a large impact on the economy, influencing the spending and borrowing patterns of American households and businesses. When the Federal Reserve raises its benchmark rate to control inflation, the money supply decreases and the economy is supposed to slow down. When the Federal Reserve lowers its benchmark rate, banks ease financial pressure on consumers, making it less expensive to take on debt, from auto loans to credit cards and mortgages.

A 0.25% interest rate cut on December 18 will have an effect on American households, although the immediate impact is likely to be minimal. The federal funds rate has remained stable in a range of 5.25% to 5.5% for more than a year, and a third cut will reduce it to a range of 4.25% to 4.5%.

Borrowing rates will remain high through 2025, and experts say this could be the last rate cut for a while. Financial markets are betting that the central bank will slow the pace of further rate cuts next year or postpone them altogether.

Expect another rate cut at next week’s Fed meeting

Since the Fed’s role is to balance maximum employment and relative price stability, it weighs heavily in the monthly report. Bureau of Labor Statistics Jobs Report and the Consumer Price Index Report when deciding whether to raise or lower the federal funds rate, the rate used by banks to borrow and lend to each other overnight.

Annual inflation is gradually improving, up to 2.7% from 9.1% in mid-2022. But price growth remains stubborn and inflation pressures are expected to increase under the next administration.

The labor market also plays a role. In September, amid signs that the labor market was weakening, the central bank began lowering rates to avoid a recession. Today, unemployment is higher than last year’s low (4.2% versus 3.4%), but the labor market is not collapsing.

Following the release of those jobs and inflation data earlier this week, market expectations shifted dramatically toward a 96% probability of a quarter-percentage-point rate cut, according to the CME FedWatch Tool.

Many experts believe that since a third rate cut was already planned this year, the economic outlook would have had to change more dramatically for the Federal Reserve to change its plans.

“(Federal Reserve Chairman Jerome) Powell has led markets to believe that the Fed will make cuts and will not want to disappoint the markets,” he said. Robert Frychief economist at Robert Fry Economics.

Expect fewer interest rate cuts in 2025

Since progress on inflation has stalled, the Fed is not likely to cut rates again until there are more consistent signs of cooling. Summary of economic projections for September predicted around four rate cuts throughout 2025, and the Fed will release new projections at its next meeting.

“I now expect two rate cuts in 2025, up from the four I expected a few months ago,” Fry said.

If the central bank lowers rates next week, Preston CaldwellMorningstar’s chief U.S. economist, doesn’t expect another cut right after President-elect Donald Trump’s inauguration.

“If they cut in December, there’s a very good chance they won’t cut in January,” Caldwell said. “If they postponed the decision in December, maybe they’ll go ahead and cut in January.”

Although the Federal Reserve could consider an interest rate cut in March, monetary policy will still depend on future economic data. Inflation remains above the Federal Reserve’s annual target of 2%, and Trump’s economic agenda could change the Fed’s strategy in 2025.

For example, Trump’s promise to impose tariffs on goods from several countries, including China and Mexico, would increase taxes on imported goods. Companies typically pass those costs on to higher consumer prices, which could reignite inflation.

But the result remains to be seen. Economist from the University of Central Florida old snaith sees tariffs as a negotiating tactic, part of a negotiation process between the United States and its trading partners, not necessarily policies that will be applied. “In the first Trump administration, we saw some tariffs enacted,” Snaith said. “There were cries and fears that this would cause inflation, but that didn’t really manifest itself.”

Regardless of the Federal Reserve’s decisions, if you plan to borrow money for a house or a car, or if you have credit card debt, pay close attention to your annual percentage rate. Shop around to get better rates before borrowing. If you have credit card debt, consider a balance transfer card with a 0% introductory period to alleviate high APRs. And even if it becomes less expensive to borrow long-term over time, remember that lower interest rates also mean lower returns on savings accounts.

More about the Federal Reserve