Fed cuts rates again but Trump win clouds 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 on course and cut interest rates for the second time since September.
On Thursday, the Federal Reserve reduced the federal funds rate by a quarter point to bring the short term rate down to a set range of 4.5% to 4.75%. The rate cut follows a half-point cut on Sept. 18.
The short term rate is used for overnight loans among banks, but it plays a huge role in influencing many interest rates that consumers and businesses pay to borrow throughout the economy, including credit card rates.
Many economists still expect another quarter-point cut ahead in December. But the outlook for 2025 could be cloudier, as the Fed will keep a close eye on inflation and the jobs picture.
Jonathan Smoke, chief economist for Cox Automotive, said the Fed’s path after the upcoming Dec. 18 meeting is “a little less certain” but he maintains that it’s still possible for the Fed to ultimately drive the federal funds rate down to a set range of 3.25% to 3.5% after more interest rate cuts in 2025.
“Much will depend on how the economy plays out and how policy actions may influence inflation,” Smoke said.
The economy is expected to keep growing, he said, seeing possibly more momentum in the fourth quarter and early next year as the Nov. 5 election uncertainty has diminished.
“The next few weeks will be telling,” Smoke said.
Consumers could see lower interest rates, he said, over the next six months.
Even so, mortgage rates could remain high. The 30-year fixed rate mortgage averaged 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 down from the 7.5% weekly average a year ago on Nov. 9, 2023.
But we’re talking about a hike from the 6.08% recent low that was hit in the Sept. 26 survey.
Mortgage rates — which don’t move in lockstep with changes in the federal funds rate — have gone up in recent weeks based on various headwinds, including the outlook for the economy and the 2024 presidential election.
Market watchers and economists say bond yields moved higher on concerns that Trump’s proposed tariff, immigration and tax policies would fuel inflation, giving the Fed little room to keep rates low.
“As investors worry about higher inflation that could be caused by a Trump presidency, they’ll continue to demand higher yields on 10-year Treasury bonds,” said Jacob Channel, senior economist for LendingTree.
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Interest rates overall may not decline aggressively in 2025, experts say, if the Trump administration initiates policy changes that stoke inflation and work against the Fed.
“A key risk is higher inflation forcing the Fed to turn hawkish again,” Smoke said.
On Wednesday, Smoke remained optimistic that the country “will see policy changes that represent more of a middle road that are better for the overall economy than the extremes feared.”
Right now, Smoke said, the economy is seeing a wave of positive momentum in the short term, especially for the important spring selling season for cars and trucks.
Consumers can expect to see lower car loan rates in the spring, he said, perhaps hitting an average of around 8% for new car and truck loans that consumers qualify for next year. While that’s much better than nearly 10% in 2024, it is higher than the 5.8% average low in 2021.
Currently, the average new car loan rate that consumers are receiving is 9.3%. Well-qualified borrowers receive lower rates and can be expected to see even more low rate offers. Some lenders, Smoke said, could be more willing to get aggressive on rates in the next few weeks.
“I have no doubt that high rates — and limited affordability — held back new sales in 2024,” Smoke said. “It was the first year without supply limitations and with a positive economy where we failed to exceed long term sales average.”
The car and truck market, Smoke said, is still limited by affordability and the supply of vehicles available so automakers will not 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.
The risk, as some economists see it, is that the Fed could have to switch course sometime later next year and end its rate cutting cycle.
Many Trump supporters consistently blamed the Biden administration — and presidential candidate Vice President Kamala Harris — for the inflation that ran out of control and peaked in the second half of 2022.
The U.S. economy is doing well, but many consumers aren’t studying GDP numbers. They’re glaring at the numbers on receipts from the gas station or grocery store.
I spoke with one Trump voter this week who said his family of four was now paying $400 a week for groceries when they used to pay $200 or $220 before inflation took off.
Vasilios Raspoptsis, 33, of Warren, told me that he and his wife cannot afford to pay thousands of dollars for day care, so he now is 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 2024.
Yet, economists warn that many of the campaign promises Trump made in 2024 could end up fueling inflation, not putting a stop to it.
“Many of Trump’s key policy proposals — such as universal tariffs and mass deportations — are likely to cause inflation to rise again,” said Channel, of LendingTree.
“If this happens, then the Fed may have no choice but to reverse course and prematurely end its current rate cutting cycle.”
The stock market broke one record after another since the economy recovered from the COVID-19 pandemic.
The Dow Jones Industrial Average is up nearly 54% from its close on Election Day 2020 through its close on Election Day 2024.
And then it went up even more.
Wall Street pretty much threw a party over the Trump win Wednesday with the Dow gaining 1,508.05 points or 3.57% on the day after the election to set a new record close of 43,729.93 points.
Investors see more opportunities for mergers and acquisitions, tax cuts, higher corporate profits and lighter regulation.
Economists, though, warn that the economy could end up weaker than some might expect under a Trump administration.
“The risk of both resurgent inflation and outright recession will be higher, and both car and home sales will probably remain weak as a result,” Channel said Thursday morning.
One Trump proposal relating to car loans, which was announced at the Detroit Economic Club on Oct. 10, might help drive some car sales if enacted.
“Many of Trump’s tax proposals will be contentious,” said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
But Trump’s proposal to allow a tax deduction for interest on car loans might have more overall appeal and work into the current federal tax structure, Luscombe said. Such a change would have to be a part of tax law changes approved by Congress.
“There is already a deduction for mortgage interest, the most expensive purchase of many Americans,” Luscombe said. “So, a deduction for interest on car loans, often the second most expensive purchase, could fit in easily.”
Being able to deduct car loan interest from your federal taxes might encourage some consumers to take on costly car loans. But Channel added that “this is unlikely to move the needle 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 well-known for his public attacks on Fed Chair Jerome Powell, and former Fed Chair Janet Yellen.
The Federal Reserve operates independently when setting short term rates and does not take direction from Congress, the president or political campaigns. Powell has repeatedly stressed that Fed action is based on economic data.
On the campaign trail earlier in August, for example, Trump suggested that the president should be able to influence the Fed when it comes to monetary policy, such as interest rates.
Trump spoke early in August at a news conference at his Mar-a-Lago estate in Florida and was quoted by The Hill, saying he believes “strongly” the “president should have at least (a) say” in the Fed’s monetary policy, such as the direction of interest rates.
Trump defended his criticism of the Fed but appeared to back down a bit 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 that they have to listen.” Trump noted that he has “very good instincts” about rates because he has made a lot of money.
“That doesn’t mean I’m calling the shot, but it does mean that I should have a right to be able to talk about it like anybody else.”
Trump will choose the next chair of the Federal Reserve. But Fed Chair Jerome Powell said this summer that he planned to serve his full term as head of the central bank until it expires May 15, 2026.
Powell was appointed to the Fed Board of Governors by then-President Barack Obama.
Trump tapped Powell to lead the central bank beginning in 2018. At that time, 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, as high rates are no longer needed to control runaway inflation. Many consumers could definitely use a break on rates, but they clearly shouldn’t bank on a return to the super-low rates we saw back in 2021.
Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X  @tompor.