This week, the Federal Reserve cut interest rates by a quarter point in a bid to jolt a labor market that’s significantly slowed over the past few months. The reduction is the first the central bank has made this year, although Fed Chair Jerome Powell indicated that two more rate cuts could be made by the end of 2025.
Dropping interest rates is a crucial lever that the Fed can pull to fight unemployment and stimulate the economy. Lowering rates makes borrowing cheaper, allowing companies to take on more debt and boost spending.
During a news conference, Powell called the move — lowering the benchmark rate from a range of 4.25 percent to 4 percent — a “risk management” decision, and he also noted that the economy’s exhibited more growth than the Fed had initially anticipated.
“It’s not a bad economy or anything like that,” he said. “But from a policy standpoint…it’s challenging to know what to do.”
The Fed is currently contending with an unusual mix of economic conditions: We’re seeing rising unemployment and higher inflation, but — at the same time — economic growth.
“I like to call it ‘stagflation-lite,’” says Heather Long, the chief economist at Navy Federal Credit Union, referring to a rare phenomenon when inflation and unemployment are high and there’s little to no economic growth.
We asked Long to unpack the Fed’s latest move and some of this new data. Here’s her take on what it could mean for the labor market, inflation, and the financial wellbeing of the middle class.
Long: They’re really worried about the job market, which has been frozen for a year now. There’s been very little hiring and not a lot of firing. But in the last couple months, there’ve been some signs that it’s starting to crack. The unemployment rate is rising, and the rates of unemployment among Black people and young people are really surging — which usually starts to happen at the start of a downturn. The Fed’s actions today were about nipping that in the bud.
Fed Chair Powell called this an unusual situation multiple times during his press conference. The Fed is predicting that unemployment will rise a little bit more, that inflation will keep rising a bit more. But at the same time, the economy may continue to grow. It’s kind of head-scratching.
A big reason this is happening is because of the tariffs, but also because of the AI boom. The tariffs are obviously causing a lot of hardship, from forcing prices up to pushing companies to reconsider hiring because of the uncertainty. But the AI boom is causing companies to spend billions, which is propping up the economy. Still, that doesn’t feel great for the middle class and lower-income Americans, who are really getting squeezed.
It’s going to go up — no doubt about it. The question is how much. Most metrics show that we’ll land at about 3 percent by the end of the year, which is uncomfortable. If you look at the latest data, almost all the basic necessities that people buy — food, gas, housing, clothing — those costs are all rising. We’ve seen here at Navy Federal Credit Union that most middle-class people can pay their bills right now, but they don’t have the extra money to absorb higher costs. So I think a lot of people are going to be confronted with a tough holiday shopping season, where they’re going to have to make some hard calls.
We got a preview today. The new Trump appointee, Stephen Miran, was the only person who dissented [on the rate reduction], because he thought there should have been a bigger cut. For now, he’s going to be out-voted, but when Fed Chair Powell leaves office in May and somebody else takes over, things could be very different. It’s likely that rates will go lower than maybe they should be by this time next year. We’ll see.
The good news is that we’re looking at one of the lowest mortgage rates in about a year — and I do anticipate it’s going to go lower. It’s difficult to know how much lower, though, because mortgages more closely follow the 10-year bond yield. A lot of investors buy those when they’re worried about inflation and government debt. So they’ve moved down a little bit, but not as much as you’d expect.
Do I anticipate we could get down to a 6 percent or even sub-6 percent rate? Yes. But if you’re someone who’s waiting for a 5.5 percent rate or lower, that’s more of a gamble.
Generally, the best advice is to stay invested, even through rocky times. If you have some extra money that you’re wondering whether or not to invest, I think the smart thing to do is what’s known as averaging in. That’s just a fancy way of saying “putting a little bit in each month,” and it’s what I’m currently doing with my child’s 529 plan.
The other thing I’d say is to keep a bit more in your emergency fund. I’ve got a pretty good amount of savings in a CD and treasury bills that are averaging around 4 percent. We’re seeing at Navy Federal Credit Union that more Americans seem to be tightening their belts, not eating out as much, taking smaller vacations — just being a bit more conservative. I think that’s smart in turbulent times.
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