WASHINGTON — The Federal Reserve on Wednesday cut its key interest rate by a quarter of a percentage point, the third straight cut that struck a warning tone about additional cuts in the coming years.
In a move widely expected by markets, the Federal Open Market Committee cut the overnight borrowing rate to a target range of 4.25% to 4.5%, returning to the level it was in December 2022 when interest rates were moving higher.
Although there was not a great deal of ambiguity around the decision itself, the key question was what the Fed would signal about its future intentions with inflation remaining firmly above target and economic growth fairly strong, conditions that do not usually coincide with Easing the policy.
Read what changed in the Fed statement.
In introducing the 25 basis point cut, the Fed indicated it was likely to cut only two more times in 2025, according to a closely watched “point chart” matrix of individual members' future interest rate expectations. The two cuts mark a halving of the commission's intentions when the scheme was last updated in September.
Assuming quarter-point increases, officials have indicated two additional cuts in 2026 and another in 2027. In the longer term, the committee expects the “neutral” interest rate to reach 3%, 0.1 percentage point higher than the September update as the level gradually drifts away. higher this year.
“With today’s action, we have cut interest rates by a full percentage point from their peak, and our policy stance is now significantly less restrictive,” Bank Chairman Jerome Powell said in his post-meeting news conference. “We can therefore be more cautious as we consider further adjustments to our interest rate.”
He added: “Today the decision was closer, but we decided that it was the right decision.”
Stocks were sold off after the Fed's announcement while Treasury yields jumped. Futures prices trimmed expectations for cuts in 2025 to a quarter-point cut, according to CME Group's FedWatch gauge.
“We moved very quickly to get here, and I think we're moving slower going forward,” Powell said.
For the second meeting in a row, a member of the Federal Open Market Committee objected: Cleveland Fed President Beth Hammack wanted the Fed to maintain the previous rate. Governor Michelle Bowman voted no in November, the first time a governor has voted against a rate decision since 2005.
The federal funds rate sets what banks charge each other for overnight lending, but it also affects a variety of consumer debt such as auto loans, credit cards and mortgages.
The post-meeting statement changed little in terms of adjusting the “extent and timing” of further interest rate changes, a slight change in language from the November meeting.
Change in economic outlook
The cut came even though the committee raised its GDP growth forecast for the full year to 2.5%, half a percentage point higher than in September. However, in the following years, officials expect GDP to slow to its long-term forecast of 1.8%.
Other changes to the summary of economic forecasts saw the committee lower the projected unemployment rate this year to 4.2%, while headline and core inflation as measured by the Fed's preferred measure were also pushed higher to estimates of 2.4% and 2.8%, respectively. Slightly higher than the Fed's expectations. September estimates are higher than the Fed's 2% target.
The committee's decision comes as inflation holds not only above the central bank's target but also while the Atlanta Fed expects the economy to grow at a 3.2% rate in the fourth quarter and the unemployment rate hovers around 4%.
Although these conditions would be more consistent with the Fed raising interest rates or keeping them the same, officials are concerned about keeping interest rates too high and risking an unnecessary slowdown in the economy. Despite macro data to the contrary, a Federal Reserve report earlier this month noted that economic growth had risen only “slightly” in recent weeks, with signs of declining inflation and slowing hiring.
Moreover, the Fed will have to contend with the impact of fiscal policy under President-elect Donald Trump, who has signaled plans to impose tariffs, tax cuts and mass deportations, all of which could lead to inflation and complicate the central bank's job.
Powell said of Trump's plans: “We have to take our time, not rush and make a very careful assessment, but only when we actually see what the policies are and how they have been implemented.” “We're not at that point.”
Normalization of politics
Powell noted that interest rate cuts are an attempt to reset policy because they do not need to be restrictive under current circumstances.
“We think the economy is in a really good place. We think politics is in a really good place,” he said Wednesday.
With Wednesday's move, the Fed will have cut interest rates by a full percentage point since September, the month in which it took the unusual step of cutting them by half a point. The Fed generally prefers to move up or down in smaller, quarter-point increments as it weighs the impact of its actions.
Despite the strong moves to the downside, the markets took the opposite direction.
Mortgage rates and Treasury yields rose sharply during this period, which may indicate that markets do not believe the Fed will be able to cut further. The policy-sensitive two-year Treasury yield jumped to 4.3%, putting it above the federal funds rate range.
In a related action, the Fed adjusted the rate it pays on its overnight repurchase facility to the minimum federal funds rate. It uses the so-called ON RPP rate as a floor for the funds rate, which has been drifting toward the lower end of the target range.
