The Federal Reserve made three interest rate cuts in 2024. The third was December's cut of 25 basis points, where federal officials hinted at fewer interest rate cuts in 2025 as it works toward achieving a 2% inflation rate nationally.
The central bank closed out the year with a benchmark interest rate of 4.25% to 4.5%.
William Luther is an associate professor of economics at Florida Atlantic University who specializes in economic growth and monetary policy.
He spoke with WUSF's Gabriella Paul about how fewer expected interest rate cuts and an incoming Trump administration are factoring into this year's economic outlook.
Generally speaking, what is the state of our economy right now?
"At the moment, the economy is performing very well. It wasn't performing very well not too long ago, both because of the pandemic, which reduced our ability to produce goods and services quite significantly, and then, as a result of some of the policy responses to that pandemic, we had very high inflation.
But in the time since, inflation has come back down, folks returned to work, production has largely recovered. And … things are going pretty well. The question, I guess, is whether or not they will continue to go well, or whether in response to cleaning up some of those policy mistakes, we'll find ourselves in a recession."
What was the play-by-play of what the Federal Reserve was doing from the beginning of 2024 to now?
"At the start of the year, things were looking great. Inflation had fallen over the back half of 2023 and it really looked like … the Federal Reserve had achieved a soft landing.
Then in the first few months of 2024 we saw inflation pick back up. Fed officials got concerned. They delayed their their interest rate cuts. They projected fewer cuts for the year. And then, as we got a little deeper into the year, inflation turned back around. It was looking low and stable again.
Fed officials decided not to cut interest rates in July, but then in September of 2024 — almost as an admission that they had gotten behind the curve — they cut their their policy rate by 50 basis points, instead of a mere 25 [basis points]. They would follow that with subsequent cuts in November and December of 25 basis points … So, really just a back and forth year there in 2024."
We have incoming President Trump, and there's been a lot of conversation about how his economic policies — particularly concern among consumers about tariffs — might play into some decisions going into 2025. So is that something that economists are also watching?
"Every political candidate is a bit of a mixed bag. If we look back to the first Trump administration, there was a lot of deregulation, and that boosted supplies. On the other hand, we have some tariffs, and those tariffs tend to restrict supplies or or increase prices, or some combination of the two.
There are some demand side policies that that come with this president as well. It looks like we're going to get some tax cuts, which, you know, most Americans welcome, but those tax cuts are coming at a time where we already have pretty significant deficits ... and that generally puts upward pressure on interest rates. And the Federal Reserve has to take that into account when it's setting its monetary policy, so that it doesn't set its interest rate target too low."
This month, we have another another Federal Reserve decision on interest rates. What is the conversation around this month's decision?
"Well, certainly what the Fed officials said back in December suggests that they're setting the stage for a pause — that they're not going to reduce by another 25 basis points in January. Now, as more and more data becomes available, they have the option to reverse course. But my guess is that that they will pause rate cuts, and then revisit the issue in the meetings ahead."
Folks who might hear that and are wondering, well, what does that mean for me going to the grocery store or contemplating a car loan? What does this mean for them?
"Well, the immediate effect is that interest rates will remain higher for longer ... They're not going to come down as fast in 2025 as they had been projected to come down just a few months ago.
The maybe less obvious effects, but also more important effects, is that nominal spending is going to continue to slow, and that will discourage businesses from expanding production. So we may get slower real GDP growth. We could see unemployment pick up ... You know, we may experience a recession in 2025 if the Fed is over-correcting for the past inflationary period. I think that that's there's a reasonable chance of that happening."
Gabriella Paul covers the stories of people living paycheck to paycheck in the greater Tampa Bay region for WUSF. She's also a Report for America corps member. Here’s how you can share your story with her.
