Inflation has now risen for two months. Is an interest rate cut from the Fed a mistake?

The Federal Reserve is ending 2024 in a predicament similar to the one they were in when the year began: Inflation’s slowdown is looking bumpy, and officials might have to rethink just how much they’re able to cut interest rates in the year ahead. 

Policymakers on the Federal Open Market Committee (FOMC) are widely expected to announce that they’re cutting borrowing costs by a quarter of a percentage point at their final rate-setting meeting of the year on Dec. 17-18. Yet, concerns that inflation might be resisting the Fed’s attempts to return it to their 2 percent target could prompt Fed Chair Jerome Powell to say officials are going to be patient and cautious about future cuts.

The latest consumer price index (CPI) data for November was a glaring reminder that the worst inflation crisis in a generation is far from over. Grocery prices rose the most in almost two years. Gasoline prices accelerated for the first time in eight months. Overall inflation rose for a second month, and excluding food and energy, price increases haven’t budged since September. 

Fed officials, however, still assume that interest rates are restricting economic growth. Coupled with concerns about overdoing it, policymakers have said interest rates still need to come down — just at a slower pace. Meanwhile, proposals to raise tariffs and lower taxes from President-elect Donald Trump are injecting a new layer of uncertainty that inflation will glide back down. 

A rate cut in December would mark the third consecutive cut to the Fed’s key benchmark interest rate. Assuming the Fed lowers rates another quarter of a percentage point, borrowing costs will have fallen a full percentage point from a 23-year high of 5.25-5.5 percent. Those moves weigh on the borrowing costs consumers pay, as well as the yields they earn on savings accounts and certificates of deposit (CD).

Should the Fed cut interest rates for a third time in December? Economists say it’s debatable

Investors see a quarter-point cut as a near certainty, pricing in a 98.4 percent probability of lower borrowing costs, according to CME Group’s FedWatch tool. Yet, economists interviewed by Bankrate say the debate might be more lively than those odds imply. 

KPMG Economist Yelena Maleyev’s team sees the odds of a rate cut in December being closer to a coin flip. Maleyev points to how the U.S. economy expanded at a 2.8 percent pace in the third quarter of 2024, powered by robust consumer spending. Employers added more than 200,000 jobs last month, enough to keep up with population growth.

“Put all of that together, and it looks like a pretty healthy economy that doesn’t necessarily need cuts,” Maleyev says. 

Even Powell indicated that the U.S. economy looks better now than it did in September, adding that there’s nothing currently suggesting officials need to be in a rush. Fed Governor Christopher Waller, meanwhile, likened the fight to defeat inflation to martial arts. 

Both Fed officials have stressed that there are two risks with rate cuts: Not doing enough and risking a recession — or overdoing it and fueling more inflation. 

There’s plenty of reasons supporting rate cuts, too, economists say. For starters, the share of workers who’ve been unemployed for more than six months is the highest since 2017. Americans are getting hired at an even slower rate than before the pandemic, and unemployment recently moved up to 4.2 percent. 

The U.S. labor market has little room to slow down more without jeopardizing economic stability, write researchers at the Indeed Hiring Lab in their 2025 U.S. Jobs and Hiring Trends Report.  

“We have this mix of economic data, with strengths on the surface but cracks underneath,” says Julia Hermann, CFA, global market strategist at New York Life Investments. 

Inflation is nowhere near as hot as it was in the summer of 2022, when it peaked at 9.1 percent. As of November, prices are up 2.7 percent from a year ago, the second straight increase and up from a more than three-year low of 2.4 percent just in September. 

But more cooling could be coming down the pipeline. One of the biggest components of inflation — rent costs — rose by the slowest pace since 2021, while housing prices also cooled, according to the Bureau of Labor Statistics’ inflation gauge. Excluding any housing components, prices would’ve increased just 1 percent from a year ago, according to data from the Bureau of Labor Statistics. 

Facing an uncertain 2025, Fed officials are set to update their Summary of Economic Projections

What comes next for interest rates is also anyone’s best guess. 

Fed officials are set to update their Summary of Economic Projections for the first time since September. Their previous update showed four quarter-point rate cuts in 2025, according to the median estimate among officials. Meanwhile, six officials penciled in five cuts, while another two officials penciled in six. Officials may dial back those estimates as the U.S. economy continues outperforming predictions.

“Growth is definitely stronger than we thought, and inflation is coming a little higher,” Powell said at his final speech before the December meeting. “We can afford to be a little more cautious as we try to find neutral.”

Tariffs, tax cuts complicate Powell & Co.’s plans 

Fiscal policy in 2025 is another uncertainty, with tariffs front-and-center. The extent to which levies on U.S. imports impact inflation — and ultimately the Fed — depends on how large and widespread they are, economists say. Having drawn down pandemic-era savings, consumers have less spending power than they did in 2022, meaning companies might not have as much wiggle room to hike prices.

Powell remained mum on the subject during the Fed’s November post-meeting press conference and indicated in his final public remarks before the Fed’s December meeting that officials wouldn’t be taking the potential for tariffs into account.

“We can’t really start making policy on that,” Powell said. “We have to let this play out.”

Scott Anderson, chief economist and managing director at BMO, says that some of his models are returning estimates that inflation could head back up to the peaks seen in 2022 if the Trump administration enacts universal levies on all U.S. trading partners, with additional duties on goods from Mexico, Canada and China.  

“If all of these tariffs get put into place, it could be a game changer for the Fed’s ability to cut rates,” he says. “We can’t rule out the possibility that they might have to start raising rates if the worst-case scenario plays out.”

What the Fed’s rate cut means for your money

The consumers who remember the days of historically low interest rates might not think a third interest rate cut from the Fed will make much of a difference on the borrowing environment.  

Another quarter-point cut would take the Fed’s key benchmark interest rate back to a level last seen in late 2022 and early 2023. Before then, borrowing costs hadn’t been this high since late 2007. 

“Rates aren’t as high, but make no mistake, they’re still high,” McBride says. 

• Continue to chip away at high-cost debt: Despite 75 basis points of cuts so far from the Fed, credit card rates have fallen just 43 basis points, hovering above 20 percent in Bankrate data. Concentrate on chipping away at that debt, which might include utilizing a balance-transfer card with a 0 percent introductory annual percentage rate (APR).
• It’s still a good time for savers: Savings yields might have come off of their decade-plus highs as the Fed has cut interest rates, but they haven’t fallen in advance of Fed moves to the extent that was expected, McBride says. Most important, they’re also still eclipsing inflation, giving savers no-risk options to grow their purchasing power — and emergency fund.
• Stay the course through stock market volatility: The stock market has been almost euphoric since Trump won his bid for reelection, with the S&P 500 surging almost 6 percent since early November alone. The optimism might not last forever, and Wall Street already pulled back on Thursday as investors braced for stubborn inflation. Day-to-day volatility shouldn’t matter for the long-term investor, though. In fact, McBride says corrections are to be expected — and normal. Economic fundamentals are what matter most, including steady growth and a trend toward lower inflation. 

“What you’re not seeing is a sharp drop-off in growth,” McBride says. “Eighteen months ago, that’s what all the forecasts were showing. This was a pretty widely accepted recession that never materialized.”