Federal Reserve Cuts Interest Rates by 0.25% but Signals Fewer Reductions Ahead
WASHINGTON – On Wednesday, the Federal Reserve reduced its key interest rate by a quarter percentage point, marking its third consecutive cut while signaling a cautious approach to additional rate reductions in the years ahead.
The Federal Open Market Committee (FOMC) lowered its overnight borrowing rate to a target range of 4.25%-4.5%, returning to levels last seen in December 2022 when rates were on the rise.
While the rate cut itself was widely expected, markets closely watched the Fed’s guidance on future policy. With inflation persisting above target and economic growth remaining solid, the Fed’s decision to ease policy appears unconventional.
Fewer Cuts Projected in the Future
The Fed’s “dot plot” projections now suggest only two rate cuts in 2025, halving the four cuts predicted in September. Additional reductions of a quarter point each are anticipated in 2026 and 2027. Over the long term, the committee raised its projection for the “neutral” rate to 3%, reflecting a gradual shift higher this year.
“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Fed Chair Jerome Powell said during a press conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
Powell described the decision as a "closer call," but affirmed it was the “right call” given current conditions.
Market Reaction
The Fed’s announcement sparked a sharp market selloff. The Dow Jones Industrial Average fell more than 1,100 points, while Treasury yields surged. Futures pricing, tracked by the CME Group’s FedWatch tool, adjusted sharply, reducing the probability of cuts in early 2025.
“We moved pretty quickly to get to here, and I think going forward obviously we’re moving slower,” Powell said, referring to the pace of rate changes.
For the second consecutive meeting, dissent emerged among the FOMC. Cleveland Fed President Beth Hammack voted against the rate cut, favoring holding rates steady.
Economic Outlook and Inflation Concerns
The Fed raised its 2024 GDP growth projection to 2.5%, up from 2% in September, reflecting resilient economic activity. However, growth is expected to slow to 1.8% in subsequent years. Unemployment forecasts for 2024 were lowered to 4.2%, while inflation projections rose slightly, with core inflation now estimated at 2.8%, above the Fed’s 2% target.
Despite these adjustments, the Fed highlighted signs of easing inflationary pressures and slowing hiring in its economic assessment. Powell emphasized the need for a measured approach to avoid stalling economic growth.
Balancing Policy Amid Fiscal Challenges
The Fed’s task is complicated by anticipated fiscal policies under President-elect Donald Trump, including potential tariffs, tax cuts, and other measures that could fuel inflation.
“We need to take our time, not rush, and make a very careful assessment,” Powell said of the uncertain fiscal landscape.
Normalization of Policy
The Fed’s recent rate cuts aim to recalibrate policy, ensuring it aligns with current economic conditions. “We think the economy is in a really good place. We think policy is in a really good place,” Powell noted.
Despite the Fed’s easing, markets have responded oppositely, with mortgage rates and Treasury yields rising sharply. The policy-sensitive 2-year Treasury yield climbed to 4.3%, surpassing the Fed’s target range.
The Fed also adjusted its overnight repo facility rate to anchor the funds rate within the target range, reflecting its commitment to maintaining stability amid evolving market conditions.
