The US central bank cut its key interest rate by a quarter of a point on Wednesday – its third cut this year – but also signaled it expects to cut rates next year more slowly than previously thought, with inflation still well above the central bank’s two percent target.

The Fed’s 19 policymakers forecast they would cut their benchmark rate by a quarter point just twice in 2025, down from their September estimate of four rate cuts. Their new projections suggest that consumers may not enjoy much lower rates next year for mortgages, auto loans, credit cards and other forms of borrowing.

Fed officials have stressed that they are slowing rate cuts as their benchmark rate approaches what policymakers call “neutral” — a level that is thought to neither stimulate nor inhibit the economy.

Wednesday’s projections suggest policymakers may think they are not far from that level. Their benchmark rate stands at 4.3 percent after Wednesday’s move, which followed a sharp half-point cut in September and a quarter-point cut last month.

“I think the slower pace of (interest) cuts really reflects both the higher inflation readings we’ve had this year and expectations that inflation will be higher” in 2025, Chairman Jerome Powell said at a news conference.

“We are closer to the neutral rate, which is another reason to be cautious in further moves.

“Regardless,” Powell said, “we think we’re still on track for reductions.”

The loonie slides in response to the cut

The Canadian loonie slipped further against the US dollar – which continues to outperform other currencies – in reaction to Wednesday afternoon’s cut.

“Jerome Powell talked about the U.S. economy clearly outperforming not only domestic expectations, but the rest of the world,” said Karl Schamotta, chief market strategist at Corpay, a payments management firm in Toronto.

“That means US interest rates are high, and that makes the US market the best place in the world to park money.”

Several other factors have driven the loonie lower in recent months and years, including the end of a “supercycle” that saw strong demand for Canadian energy, as well as high household debt slowing consumer spending and Trump’s threat of 25 percent tariffs on Canadian goods.

With that, “you have what is essentially a lethal cocktail for the Canadian dollar,” Schamotta told CBC News. And the loonie could sink “at least a few cents lower” if Trump carries out his threat.

This would hit the export sector hard. Consumer sentiment in Canada would sink, and businesses would pull back on investment even more, Schamotta said.

All of this would mean that Canada would very likely go into recession.

Still, Canadian exporters are hurt when the loonie is too high against the U.S. dollar, Schamotta said. A lower correction could mean that some of those exports “will be put in a better position.”

“They will be able to sell exports to the world cheaper and they will be able to grow,” he said. “So this is a bit of a rebalancing process.”

High inflation persists, the pace of employment is slowing

The Fed’s rate cut this year marked a reversal after more than two years of high rates, which have largely helped tame inflation but also made borrowing painfully expensive for American consumers.

But now the Fed faces a series of challenges as it seeks to complete a “soft landing” for the economy, in which high rates manage to contain inflation without triggering a recession. Chief among them is that inflation remains stubborn: According to the Fed’s preferred measure, annual “core” inflation, which excludes the most volatile categories, was 2.8 percent in October. That is still persistently above the central bank’s two percent target.

At the same time, the economy is growing rapidly, which means that the higher rates did not slow it down too much. As a result, some economists — and some Fed officials — argue that borrowing rates should not be cut further for fear of overheating the economy and rekindling inflation.

On the other hand, the pace of hiring has slowed significantly since the beginning of 2024, which may be a concern since one of the Fed’s mandates is to achieve maximum employment.

“We don’t think we need further cooling of the labor market to get inflation below two percent,” Powell said at his news conference.

While still low at 4.2 percent, the unemployment rate has risen by nearly a full percentage point over the past two years. Concerns about rising unemployment contributed to the Fed’s decision in September to cut the key rate by half a point more than usual.

Trump’s threats of tariffs add to the uncertainty

On top of that, US President-elect Donald Trump has proposed a series of tax cuts and deregulation that together could boost growth. And his threats of tariffs and mass deportations could accelerate inflation.

Powell and other Fed officials said they could not assess how Trump’s policies might affect the economy or their own rate decisions until more details were available. Until then, the outcome of the presidential election mainly increased economic uncertainty.

This was highlighted by the Fed’s quarterly economic projections released on Wednesday.

Policymakers now expect headline inflation, measured by their preferred gauge, to rise slightly from the current 2.3 percent to 2.5 percent by the end of 2025.

Officials also expect the unemployment rate to increase slightly by the end of next year, from the current 4.2 percent to a still-low 4.3 percent.