WASHINGTON — The Federal Reserve cut its key interest rate by a quarter percentage point on Wednesday, its third consecutive cut and coming with a warning about additional cuts in coming years.
In a move widely anticipated by markets, the Federal Open Market Committee cut its overnight lending rate to a target range of 4.25%-4.5%, returning to the level of December 2022 when rates were moving higher.
Although there was some intrigue surrounding the decision, the main question was what signal the Fed would give about its future intentions given that inflation remains consistently above target and economic growth is quite solid, conditions that would normally be accompanied by policy easing. Do not match.
Reading What changed in the Fed’s statement,
Cutting 25 basis points, the Fed indicated it would likely only taper twice more in 2025, according to a closely watched “dot plot” matrix of individual members’ future rate expectations. When the storyline was last updated in September, two cuts indicated the committee’s intentions to cut in half.
Assuming a quarter-point increase, officials hinted at two more cuts in 2026 and another in 2027. In the longer term, the Committee sees the “neutral” funds rate at 3%, 0.1 percentage point higher than the September update as the level is gradually reduced. More this year.
Fed Chairman Jerome Powell will discuss Decision on rate Wednesday afternoon.
Stocks sold off after the Fed’s announcement while Treasury yields jumped.
For the second consecutive meeting, one FOMC member dissented: Cleveland Fed Chair Beth Hammack wanted the Fed to maintain the previous rate. Governor Michelle Bowman abstained in November, marking the first time a governor voted against a rate decision since 2005.
The fed funds rate determines how much banks charge each other to make overnight loans, but also affects various consumer loans such as auto loans, credit cards and mortgages.
The post-meeting statement contained little change in language from the November meeting, other than a change regarding the “extent and timing” of further rate changes.
The cut came as the committee raised its forecast for full-year GDP growth to 2.5%, half a percentage point higher than in September. However, officials expect GDP to slow to its long-term forecast of 1.8% in the coming years.
In other changes to the summary of economic projections, the committee cut its expected unemployment rate this year to 4.2%, while headline and core inflation, the Fed’s preferred gauge, were also raised to respective estimates of 2.4% and 2.8%, respectively. That’s a little more than that. Above September estimates and 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 estimates the economy will grow at 3.2% in the fourth quarter and the unemployment rate is hovering around 4%.
While those scenarios would be most consistent with the Fed raising rates or keeping rates unchanged, officials are wary of the risk of keeping rates too high and causing an unnecessary slowdown in the economy. Despite macro data to the contrary, a Fed report earlier this month said economic growth had expanded only “slightly” in recent weeks, with signs of inflation slowing and hiring slowing.
In addition, the Fed must deal with the impact of fiscal policy under President-elect Donald Trump, who has signaled plans for tariffs, tax cuts and mass deportations that could all be inflationary and complicate the central bank’s work. Can make.
Powell has indicated that the rate cut is an attempt to recalibrate policy as it does not need to be as restrictive under the current circumstances.
With Wednesday’s move, the Fed will have cut benchmark rates by a full percentage point since September, a month in which it took the unusual step of cutting them by half a point. The Fed typically prefers to move up or down in small quarter-point increments as it measures the impact of its actions.
Despite the less aggressive stance, the markets have taken a contrarian stance.
Both mortgage rates and Treasury yields have risen sharply during this period, possibly indicating that the market does not believe the Fed will be able to make more cuts. The policy-sensitive 2-year Treasury yield rose to 4.3%, keeping it above the Fed’s rate range.
