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WASHINGTON — The Federal Reserve cut its key interest rate by a quarter of a percentage point on Wednesday, its third straight cut, and expressed caution about further cuts in the coming years.
The Federal Open Market Committee lowered the overnight borrowing rate to a target range of 4.25%-4.5%, returning to levels seen in December 2022 when rates were higher, a move that was widely expected.
While the decision itself is unattractive, the main question is what signal the Fed will send about its future intentions as inflation remains steady above target and economic growth is reasonably solid, conditions that are generally not consistent with policy easing.
In cutting interest rates by 25 basis points, the Fed said it was likely to cut interest rates only two more times in 2025, based on a closely watched “dot plot” matrix of individual members’ expectations for future interest rates. The two cuts represent the commission’s intentions when the plot was last updated in September, having been slashed in half.
Assuming a 25 basis point increase, officials said there would be two more rate cuts in 2026 and one more in 2027. Over the longer term, the committee considers the “neutral” funds rate to be 3%, 0.1 percentage point higher than the rate updated in September, as that level has gradually drifted higher this year.
“With today’s action, we have lowered the policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Chairman Jerome Powell said. his post-meeting press conference. “As a result, we can be more cautious when considering further adjustments to policy rates.”
“Today was a close call, but we think it’s the right decision,” he added.
stocks sold off U.S. Treasury yields rose sharply after the Fed’s announcement.
For the second consecutive meeting, a member of the Federal Open Market Committee (FOMC) raised objections: Cleveland Fed President Beth Hammack wants the Fed to keep interest rates at their previous levels. Gov. Michelle Bowman voted no in November, the first time a governor has voted against a rate decision since 2005.
The federal funds rate determines what banks charge for overnight loans, but also affects a variety of consumer debt, such as auto loans, credit cards and mortgages.
The post-meeting statement contained few changes, with slight changes in language from the November meeting, except for adjustments to the “extent and timing” of further interest rate adjustments.
changes in economic outlook
The downward revision came despite the committee raising its full-year GDP growth forecast to 2.5%, half a percentage point higher than in September. However, officials expect GDP to slow to the long-term forecast of 1.8% over the next few years.
Other changes to the summary of economic forecasts led the committee to lower its expected unemployment rate for this year to 4.2%, while headline and core inflation, based on the Fed’s preferred measure, were also raised slightly higher than expected to 2.4% and 2.8%, respectively. The September estimate is higher than the Fed’s 2% target.
The committee’s decision comes as inflation not only remains above the central bank’s target, but the Atlanta Fed projects economic growth of 3.2% in the fourth quarter and the unemployment rate hovering around 4%.
While those conditions are most consistent with the Fed raising rates or keeping them on hold, officials are wary of the risks of keeping rates too high and the economy needlessly slowing. Despite macro data to the contrary, a Federal Reserve report earlier this month noted that economic growth had increased only “modestly” in recent weeks, with signs of inflation weakening and hiring slowing.
In addition, the Fed will have to contend with the impact of fiscal policy under President-elect Donald Trump, who has signaled plans for tariffs, tax cuts and mass deportations, all of which could stoke inflation and Complicating the work of central banks.
“We need to take our time, take our time, and evaluate very carefully, but only when we really understand what these policies are and how they are implemented,” Powell said of Trump’s plans. “We need to It’s just not that stage yet.”
policy normalization
Powell said the rate cut was an effort to recalibrate policy because it doesn’t need to be so stringent under current circumstances.
“We think the economic situation is very good. We think the policy situation is very good,” he said on Wednesday.
With Wednesday’s move, the Fed will cut its benchmark interest rate by a full percentage point since September, during which it took the unusual step of cutting interest rates by half a percentage point. The Fed generally likes to move up and down in smaller quarter-percentage increments when weighing the impact of its actions.
Despite the sharp move lower, the market took the opposite tack.
Mortgage rates and Treasury yields have both risen sharply during this period, possibly signaling that the market doesn’t believe the Fed can cut rates significantly. The yield on the policy-sensitive 2-year Treasury note jumped to 4.3%, above the Fed’s interest rate range.
In a related action, the Fed adjusted the interest rate paid on its overnight repurchase facility to the lower bound of the federal funds rate. The so-called ON RPP rate is used as a floor for the funds rate, which has been drifting toward the lower end of the target range.
