PROVIDENCE – Most major banks have reduced their prime lending rates by a quarter-point, the third reduction in three months following the Federal Reserve’s move to cut its key interest rate on Dec. 18.
But the Fed’s policymakers also signaled that it may reduce its rate more slowly than expected in 2025 because inflation still remains high. The Fed’s benchmark interest rate is one of the levers that the U.S. central bank can use to keep inflation in check. Higher rates can cool an economy and lower inflation while a lower rate can spur economic growth and heighten inflation.
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Following the Fed’s decision to follow through on a quarter-point interest rate reduction, banks with some of the largest deposit market share in Rhode Island such as Bank of America Corp., Citizens Financial Group Inc., Santander Bank and TD Bank reduced their prime lending rate from 7.75% to 7.5%.
The prime lending rate is a base interest rate that banks use to set rates for different types of loans, credit cards and lines of credit.
The Fed rate cut on Dec. 18 reduced its benchmark rate to a range of 4.25%, down from 4.5% to 4.75%. In early September, the rate had been at a four-decade high of 5.25% to 5.5%. The Fed had kept its rate that high for more than a year to fight the worst inflation streak in four decades. Annual inflation has since fallen from a 9.1% peak in mid-2022 to a 3½-year low of 2.4% in September. It ticked up to about 2.7% in November.
Fed officials have underscored that they are slowing their rate reductions as their benchmark rate nears a level that policymakers refer to as “neutral” – the level that is thought to neither spur nor hinder the economy. Wednesday’s projections suggest that policymakers may think they are not very far from that level.
After their half-point rate cut in September – their first such move in more than four years – the policymakers had projected that they would make further quarter-point cuts in November and December – which it did – and four more next year, which now seems unlikely.
With the economy now mostly solid and Wall Street anticipating faster growth, larger budget deficits and higher inflation under a Trump presidency, policymakers believe further rate cuts might serve to overheat the economy.
With reports from The Associated Press.