On Wednesday, The Federal Reserve slashed interest rates by a quarter-point, the third consecutive meeting where it has lowered borrowing costs. While the rate cut was widely expected, investors were much more keen to know: What is the central bank thinking about next year?
Related: Interest Rates Demystified: From Federal Funds to Your Finances
The Fed Cuts Rates By a Quarter Point
In a move anticipated by markets, the FOMC cut its overnight borrowing rate to a target range of 4.25%-4.5%, back to the level where it was in December 2022 when rates were on the move higher.
Though there was little intrigue over the decision itself, the main question had been over what the Fed would signal about its future intentions as inflation holds steadily above target and economic growth is fairly solid, conditions that don’t normally coincide with policy easing.
In delivering the 25 basis point cut, the Fed indicated that it probably would only lower twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations. The two cuts were below the committee’s intentions when the plot was last updated in September with four.
So, Why Fewer Rate Cuts?
Inflation is being stubborn, while the job market has stayed healthy, prompting the Fed to recalibrate. The central bank is trying to strike a delicate balance between lowering rates too fast (inflation go up) and lowering them too slowly (unemployment go up).
In a statement on Wednesday, Fed chair Jerome Powell said, “From this point forward it’s appropriate to move cautiously and look for progress on inflation.”
Then, there are big question marks introduced by the incoming Trump administration. Economists widely view Trump’s plans on tariffs, tax cuts, and mass deportations as inflationary, and the Fed did raise its forecast for inflation in 2025. Powell was characteristically tight-lipped when talking about President Trump, saying that it was too early to assess how his proposed policies would impact interest rates.
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