The Fed cuts interest rates by a quarter point

WASHINGTON — The Federal Reserve cut its key interest rate by a quarter of a percentage point on Wednesday, the third cut in a row and one that came with a note of caution about further cuts in coming years.

In a move widely anticipated by markets, the Federal Open Market Committee cut overnight rates to a target range of 4.25%-4.5%, back to levels seen in December 2022 when rates were rising.

While there was little intrigue about the decision itself, the main question was what the Fed would signal about its future intentions, given that inflation remains steadily above target and economic growth is fairly solid, conditions that normally do not coincide with policy easing.

Read what changed in the Fed statement.

In making the 25 basis point cut, the Fed indicated that rates were likely to fall only twice more in 2025, according to its closely watched dot plot matrix of individual members’ future interest rate expectations. The two cuts indicated that the committee’s intentions were halved when the plot was last updated in September.

Assuming quarter-point increases, officials indicated two more cuts in 2026 and another in 2027. Longer term, the commission sees the “neutral” funds rate at 3%, 0.1 percentage point higher than in the September update, as it level has gradually drifted away. higher this year.

“With today’s action, we have lowered our key rate by a full percentage point from the peak, and our policy stance is now significantly less restrictive,” Chairman Jerome Powell said at his post-meeting news conference. “We may therefore be more cautious as we consider further adjustments to our policy rate.”

“Today was a close call, but we decided it was the right decision,” he added.

Stocks sold off sharply after the Fed’s announcement, with the Dow Jones Industrial Average closing up more than 1,100 points, while Treasury yields soared. Futures prices have lowered the outlook for cuts in 2025, according to CME Group’s FedWatch measure.

“We’ve moved pretty fast to get here, and I think we’re definitely going to slow down going forward,” Powell said.

For the second consecutive meeting, one FOMC member disagreed: Cleveland Fed President Beth Hammack wanted the Fed to maintain the previous interest rate. Governor Michelle Bowman voted no in November, the first time a governor voted against an interest rate decision since 2005.

The fed funds rate determines what banks charge each other for overnight loans, but it also affects a variety of consumer debt, such as car loans, credit cards and mortgages.

The statement after the meeting changed little, apart from an adjustment regarding the “magnitude and timing” of further interest rate changes, and a small change in language from the November meeting. Goldman Sachs said the adjustment was “indicative of a slower pace of future rate cuts.”

The cut came despite the commission raising its projection for gross domestic product growth for all of 2024 to 2.5%, half a percentage point higher than in September. In subsequent years, however, officials expect GDP to slow to the long-term projection of 1.8%.

Other changes to the Summary of Economic Projections saw the committee lower this year’s projected unemployment rate to 4.2%, while pushing headline and core inflation on the Fed’s preferred gauge to 2.4% and 2.4% estimates respectively 2.8%, slightly higher than expected inflation. September estimate and above 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 forecasts the economy will grow 3.2% in the fourth quarter and the unemployment rate is around 4% swings.

While these conditions would be most consistent with the Fed raising or maintaining rates, officials are wary of keeping rates too high and risking an unnecessary slowdown of the economy. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had risen only “slightly” in recent weeks, with signs of easing inflation and slowing hiring.

In addition, the Fed will have to deal with the impact of fiscal policy under newly-elected President Donald Trump, who has signaled plans for tariffs, tax cuts and mass deportations, all of which could be inflationary and complicate the central bank’s work.

“We need to take our time, not rush and make a very careful assessment, but only once we have actually seen what the policy is and how it has been implemented,” Powell said of Trump’s plans. “We’re just not at that stage yet.”

Powell has indicated that the rate cuts are an attempt to recalibrate policy, as it does not need to be so restrictive under current conditions.

‘We think the economy is running [a] really good place. We think the policy is in a very good place,” he said on Wednesday.

With Wednesday’s move, the Fed will have cut rates by a full percentage point since September, a month in which it took the unusual step of cutting rates by half a point. The Fed generally likes to move up or down in smaller quarter-point increments as it weighs the impact of its actions.

Despite the aggressive price declines, markets have taken the opposite tack.

Mortgage rates and Treasury yields both rose sharply during the period, possibly indicating that markets do not believe the Fed will be able to cut much further. The policy-sensitive yield on two-year government bonds rose to 4.3%, putting it above the Fed’s interest rate range.

In connection with this, the Fed has adjusted the interest rate it pays on its overnight repo facility to the lower end of the Fed Funds rate. The so-called ON RPP rate is used as a floor for the fund rate, which drifted towards the bottom of the target range.