Interest rate cuts may pause soon, experts say. Here's why

When the Federal Reserve made a landmark decision to begin interest rate cuts this fall, central bankers predicted a steady lowering of rates that would stretch into 2026.

But the Fed may slow, or even pause, those plans as early as the coming months, some experts told ABC News. The potential freeze could prolong the pain for borrowers hammered by high-cost mortgage or credit card payments.

Stubborn inflation over recent months has thrown a wrench into central bank hopes of a drawdown of rates, and the possibility of resurgent inflation under President-elect Donald Trump could further complicate plans, experts said.

"It's likely the Fed is going to pause rate cuts for a while," John Sedunov, a finance professor at Villanova University's School of Business, told ABC News.

For now, the Fed is sticking to its plans. The chances of a rate cut when the Fed meets this week are all but certain, according to the CME FedWatch Tool, a measure of market sentiment.

However, investors show similarly high confidence that the Fed will leave rates unchanged at its following meeting in January, the measure shows.

Consumer prices rose 2.7% in November compared to a year ago, marking two consecutive months of rising inflation, government data last week showed.

Inflation has slowed dramatically from a peak of more than 9% in June 2022. But the recent uptick has reversed some progress made at the start of this year that had landed price increases right near the Fed's target of 2%.

"One of the things that's sinking into people's minds is that inflation is a little bit -- just a tad -- more stubborn than the Fed would like," Paul Wachtel, a professor of economics at New York University who studies interest rate policy, told ABC News.

In recent months, the Fed has cut its benchmark rate three-quarters of a percentage point, dialing back its fight against inflation and delivering some relief for borrowers saddled with high costs.

Even after the cuts, the benchmark rate stands between 4.5% and 4.75%, its highest level in nearly two decades.

Despite high borrowing costs, the economy has proven resilient. The labor market has slowed but remains solid. The unemployment rate stands at 4.2%, a historically low figure.

The robust health of the economy likely eases concern among policymakers that high interest rates could tip the economy into a downturn, Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former Federal Reserve official, told ABC News.

"There seems not much urgency or even reason to cut," Gagnon said.

To be sure, the central bank has emphasized that it will adjust its rate decisions based on incoming economic data. Evidence of cooling inflation or a weakening economy may nudge policymakers toward interest rate cuts, just as the persistence of current conditions could pause rate cuts.

"If the economy remains strong and inflation is not sustainably moving toward 2%, we can dial back policy restraint more slowly," Fed Chair Jerome Powell said during a press conference in Washington, D.C., last month.

"If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can move more quickly," Powell added.

The path of interest rates is especially difficult to predict due to the impending arrival of the Trump administration next month, experts said.

Some economists expect Trump's proposals of heightened tariffs and the mass deportation of undocumented immigrants to raise consumer prices. Such an outcome would put pressure on the Fed to hold rates steady or even hike them, Gagnon said.

When asked last month about the Fed's potential response to Trump, Powell said the central bank would wait until it gains clarity about the exact policies and their implications. "We don't guess, we don't speculate and we don't assume," Powell said.