By CHRISTOPHER RUGABER, AP Business Editor

WASHINGTON (AP) — The Federal Reserve on Thursday cut its key interest rate by a quarter point in response to the steady decline in once-high inflation that angered Americans and contributed to Donald Trump’s victory in the presidential election this week.

The rate cut follows a larger half-point cut in September and reflects the Fed’s renewed focus on supporting the labor market as well as combating inflation, which now barely exceeds the central bank’s 2% target.

Asked at a news conference what impact Trump’s election might have on Fed policy, Chairman Jerome Powell said that “in the short term, the election will have no effect on our decisions (in terms of interest rates).”

But the election of Trump, beyond its economic consequences, has raised the specter of a interference by the White House in the Fed’s policy decisions. Trump argued that as president, he should have a say in the central bank’s interest rate decisions. The Fed has long defended its role as an independent agency capable of making tough decisions about borrowing rates, without political interference. Yet during his previous tenure in the White House, Trump publicly attacked Powell after the Fed raised rates to combat inflation, and he may do so again.

Asked if he would resign if asked by Trump, Powell, who will have one year remaining in his second four-year term as head of the Fed when Trump takes office, replied simply: “No.” .

And Powell said that in his view, Trump could not fire or demote him: that would “not be permitted by law,” he said.

The Fed’s rate cut Thursday brought its benchmark rate to around 4.6%, down from its four-decade high of 5.3%. The Fed has kept its rate this high for more than a year to combat the worst inflation streak in four decades. Annual inflation has since fallen from a peak of 9.1% in mid-2022 to a three-and-a-half-year low of 2.4% in September.

At the end of its latest policy meeting Thursday, the Fed issued a statement noting that “the unemployment rate has increased but remains low,” and that although inflation has moved closer to the 2% target level, it ” remains somewhat high.

After their September rate cut – the first such rate cut in more than four years – policymakers had planned to make further quarter-point cuts in November and December and four more next year. But with the economy now generally strong and Wall Street anticipating faster growth, larger budget deficits and higher inflation under a Trump presidency, further rate cuts may have become less likely. Fed rate cuts generally lead to lower borrowing costs for consumers and businesses over time.

Powell declined to clarify Thursday whether the Fed would make an additional quarter-point rate cut in December or the four rate cuts its policymakers have planned for 2025.

Diane Swonk, chief economist at accounting giant KPMG, said she believed Powell was reluctant to give guidance on the Fed’s next steps because of the uncertainty caused by Trump’s election victory.

“He’s not willing to get too far ahead of his skis, given everything that could change,” she said. “In an environment where you don’t know how election promises translate into concrete policies, you don’t want to take the lead. »

However, Matthew Luzzetti, an economist at Deutsche Bank, said there are signs that the Fed may end up announcing fewer rate cuts next year than many economists think. The job market and economy appear healthier than they appeared in September, when the Fed announced a whopping half-point rate cut.

“Nothing in the economic data,” Luzzetti said, “suggests that the (Fed) needs to be pressed” to substantially lower rates.

On Thursday, Powell expressed confidence that inflation, despite some higher-than-expected recent readings, would continue to fall toward the Fed’s target.

“We think the story is entirely consistent with inflation continuing on a bumpy path over the next couple of years and stabilizing around 2%,” he said.

The economy obscures the picture by sending out contradictory signals, with solid growth but hiring weakens. Consumer spending, however, has been healthy, fueling fears that the Fed may not need to reduce borrowing costs and that doing so could overstimulate the economy and even reaccelerate inflation.

Financial markets are throwing a new curve at the Fed: Investors have pushed Treasury yields higher since the central bank cut rates in September. The result was higher borrowing costs across the economy, diminishing the benefit to consumers of the half-point cut in its benchmark rate announced by the Fed after its meeting. september.

Broad interest rates have risen because investors anticipate higher inflation, larger federal budget deficits and faster economic growth under President-elect Trump. Trump’s plan to impose tariffs of at least 10% on all imports, as well as significantly higher taxes on Chinese goods, and carry out a mass expulsion of undocumented immigrants, would almost certainly have stimulate inflation. This would make it less likely that the Fed will continue to cut its key rate. Annual inflation as measured by the central bank’s preferred indicator fell to 2.1% in September.

Economists at Goldman Sachs estimate that Trump’s proposed 10% tariff, as well as his proposed taxes on Chinese imports and on automobiles from Mexico, could raise inflation to between 2.75% and 3% d by mid-2026.

The economy has seen solid annual growth of just under 3% over the past six months, while consumer spending, fueled by higher income buyers — increased sharply during the July-September quarter.

But companies have cut back on hiring, and many unemployed people are struggling to find jobs. Powell suggested the Fed was cutting its key rate in part to support the labor market. If economic growth continues at a steady pace and inflation rises again, the central bank will be under pressure to slow or stop its rate cuts.

Asked at his news conference about Americans feeling little relief from the pain of high prices that helped fuel Trump’s victory, Powell said:

“It takes a few years of real wage gains to make people feel better, and that’s what we’re trying to create, and I think we’re on the right track to do that.” Inflation has fallen significantly, the economy is still strong here, wages are increasing, but at a sustainable level.

“I think what needs to happen is happening, and a lot of it has happened, but it’s going to be a while before people get the confidence back and feel that way. »

AP Business Writer Alex Veiga contributed to this report from Los Angeles.

Originally published: November 7, 2024 at 8:10 a.m. PST