Federal Reserve Chairman Jerome Powell and his colleagues cut interest rates on Thursday in response to easing inflation.

Anna Moneymaker/Getty Images North America

Hide caption

Toggle label

Anna Moneymaker/Getty Images North America

The Federal Reserve cut interest rates by a quarter of a percentage point on Thursday, as expected. However, the central bank may become more cautious about future rate cuts as it monitors the impact of economic policies in a second Trump administration.

The Fed's interest rate setting committee cut its key interest rate to a range of between 4.5% and 4.75% as policymakers responded to easing inflation and signs of a slowdown in the labor market.

The move follows an aggressive half-percentage point rate cut at the Fed's last meeting in September.

Inflation is slowly approaching the Fed's target of 2%. By the Commerce Department's measure, which is closely watched by the Fed, it was just above that level in September.

At the same time, the number of new hires has cooled. U.S. employers added just 12,000 jobs in October – although that number was likely depressed by the Boeing strike that ended this week and the fallout from back-to-back hurricanes in the Southeast.

The Fed's job may have become more difficult

The Fed is trying to strike a balance between interest rates that are high enough to keep inflation under control but not so high that they weaken the labor market.

Inflation rose sharply in the wake of the pandemic and the Russian invasion of Ukraine. The Fed responded by raising interest rates to their highest level in more than two decades and keeping them there for more than a year before beginning cuts in the fall.

On average, Fed policymakers forecast in September that interest rates would be about a quarter of a percentage point lower this year than they are now, and would fall another full point next year.

That rate-cutting roadmap, drawn up ahead of this week's election, could see some slowdowns if the president-elect follows through on his economic promises.

President-elect Trump speaks to his supporters in West Palm Beach, Florida, on November 6, 2024. Economists worry that some of Trump's proposed economic policies, including tariffs on imports, could drive up prices.

Chip Somodevilla/Getty Images/Getty Images North America

Hide caption

Toggle label

Chip Somodevilla/Getty Images/Getty Images North America

Trump has promised to cut taxes, impose sweeping tariffs and deport large numbers of immigrants living in the country illegally.

Analysts say any of these moves could put upward pressure on prices, even though Trump campaigned on promises to reduce inflation, a key concern for many voters. Stubborn inflation could make the Fed more cautious about cutting interest rates in the future.

While the Fed sets short-term interest rates, longer-term borrowing costs are typically set by the bond market. Investors pushed bond yields higher this week as they prepared for the possibility that Trump's policies could result in trillions of dollars in new federal debt.

Rising bond yields caused mortgage costs to rise. According to Freddie Mac, the average interest rate on a 30-year home loan rose to 6.79%.

What will Trump do about the Fed?

Trump also poses a challenge to the Fed's independence. The central bank is supposed to be insulated from political pressure, allowing it to make unpopular decisions when necessary and raise interest rates to control inflation.

During his first term in the White House, Trump repeatedly flouted this convention, criticizing the Fed and his appointed chairman for not cutting interest rates quickly enough. Trump also accused the Fed in September of cutting interest rates just before the election because he feared it would help his political rival, Vice President Kamala Harris.

Fed Chairman Jerome Powell insists that he and his colleagues base their decision-making solely on economic factors, and he generally ignored Trump's tough remarks. However, Powell's term ends in 2026, which could give Trump the opportunity to appoint a more malleable successor.