Following its September rate cut, the U.S. Federal Reserve (Fed) has lowered its benchmark interest rate for a second consecutive time. After a two-day Federal Open Market Committee (FOMC) meeting, the Fed announced on the 7th that it would cut the rate by 0.25 percentage points, moving it from 4.75-5.0% to 4.50-4.75%. This marks a series of reductions following the "big cut" in September, when the Fed slashed the rate by 0.5 percentage points for the first time in four years. Here, we analyze the factors behind this decision and how the rate cut will impact consumers.

Relief for Businesses and Households
The Fed’s decision to reduce the benchmark rate aligns with market expectations, as inflation is nearing the Fed’s 2% target, and labor market overheating has eased. Market experts anticipated further cuts following the September reduction, as Fed Chair Jerome Powell indicated that rate cuts would continue at subsequent policy meetings. Despite former President Donald Trump’s recent election win, Wall Street largely agrees that the Fed is likely to enact another rate cut at the December 17-18 meeting. Notably, the FOMC unanimously supported the latest rate reduction with a 12-0 vote.

With inflation approaching target levels, maintaining high rates in the upper 4% range risks hampering economic growth, creating a burden for both companies and households.

JP Morgan Chief Economist Michael Feroli commented in a Bloomberg interview that while the recent election outcome may influence the Fed’s future policies, it will likely have little effect on rate cuts in November or December.

At Least Four Rate Cuts Projected for Next Year
Economists largely anticipate that Trump's re-election and proposed tax cuts could fuel inflation, as tariffs on imports and further tax relief are expected to drive up costs. However, experts agree that the Fed will likely continue with rate cuts next year. The Fed’s projections indicate that the median federal funds rate will fall to 3.4% by the end of 2025 (down from June's 4.1% forecast), and 2.9% by the end of 2026, reflecting expectations for at least four additional 0.25% rate cuts next year.

In a statement, the Fed noted that “recent indicators suggest that economic activity continues to expand at a robust pace.” While acknowledging a slight increase in the unemployment rate, the Fed emphasized its commitment to its dual mandate—maximizing employment and stabilizing prices.

Consumers Still Facing High Interest Burdens
As the Fed lowers rates, consumers should feel some relief in interest rates for credit cards, mortgages, and auto loans. Auto loan rates, influenced by the five-year Treasury rate, are determined by a combination of factors, including personal credit scores, vehicle type, purchase price, down payment, and loan term.

Mortgage rates, meanwhile, are more closely tied to the 10-year Treasury rate rather than the Fed’s benchmark rate. Fixed 30-year mortgage rates, currently nearing 7%, may see a modest decrease, while rates for home equity loans and lines of credit, which are directly impacted by the Fed’s benchmark rate, may also see reductions.

Existing federal student loan borrowers will see no change, as most have fixed-rate loans. However, new borrowers will benefit from the lower rates. Current undergraduate loan rates hover between 4-5%, significantly higher than the sub-3% rates available just three years ago.

Previously, high rates benefited savers through higher interest rates on CDs and savings accounts. However, as rates decline, financial institutions are beginning to reduce savings rates as well. Savers may want to lock in current rates on CDs before further cuts.

<Hwandong Cho>