The Federal Reserve reduced its key interest rate by 0.25 percentage points on Wednesday, marking a continued effort to adjust monetary policy. However, the central bank’s outlook for the future is now more cautious, with a significantly slower pace of rate cuts projected for 2025. This shift follows a recent uptick in inflation and robust economic growth.
Slower Pace of Rate Cuts Ahead
The Federal Reserve now anticipates just two rate cuts in 2025, a notable reduction from the four cuts they forecast in September. This change reflects a revised outlook that includes stronger economic growth, persistent inflation, and a more resilient labor market through both this year and 2025. These factors suggest that fewer rate cuts will be needed moving forward.
The forecasts made by the Federal Reserve could be influenced by the policies outlined by President-elect Donald Trump, including his plans to impose heavy tariffs on imports, restrict immigration, and cut taxes. Economists from Barclays and Goldman Sachs have suggested that these policies may be contributing to the Fed’s expectation of higher inflation and continued growth in the coming year.
Cautious Approach by Federal Reserve
The Federal Reserve’s statement following the two-day meeting emphasized a more careful consideration of future rate adjustments. The statement, which previously read “In considering additional adjustments…” has been revised to include more specific language: “The Fed will carefully assess incoming data, the evolving outlook, and the balance of risks.” This change indicates that Fed officials are likely to take a more cautious approach when determining when and how much to adjust rates, potentially resulting in fewer or smaller rate cuts.
Wednesday’s decision marks the third consecutive rate cut by the Fed, bringing the benchmark short-term rate to a range of 4.25% to 4.5%. This move is expected to have a broad impact, lowering borrowing costs for credit cards, some mortgages, and auto loans. However, it may also lead to lower interest rates for savings accounts, which had recently been providing higher returns to savers.
Current Federal Reserve Interest Rate
Looking ahead, Federal Reserve officials now estimate that the federal funds rate will fall by only 0.5 percentage points in 2025, bringing it to a range of 3.75% to 4%. This is half the drop they had projected in September. Additionally, they foresee two more cuts in 2026, bringing the rate to approximately 3.4%, which is also slightly higher than previously expected. The Fed has also adjusted its estimate for the “neutral” rate, which is the level that neither stimulates nor slows the economy, raising it from 2.9% to 3%. This adjustment suggests that officials may not need to make as many cuts to reach the neutral rate.
The Federal Reserve reduces interest rates to make borrowing cheaper, helping to stimulate economic activity when needed. Conversely, it raises rates to combat inflation by making borrowing more expensive and cooling down the economy. In 2022 and 2023, the central bank raised the federal funds rate from near zero to 5.25% to 5.5%, the highest level in 23 years, in response to a surge in prices related to the pandemic.
Fed’s Monetary Policy Goals
The Federal Reserve’s preferred inflation measure has decreased significantly, from 7% in mid-2022 to 2.3% in recent months. As a result, the Fed has made several rate cuts, including a significant 0.5-point reduction in September and a quarter-point reduction in early November. However, recent data has presented challenges for the Fed, as core inflation—excluding food and energy—has ticked up slightly from 2.7% in July to 2.8% in October. Moreover, the consumer price index (CPI) rose sharply for the fourth consecutive month in November, adding to the complexity of the Fed’s decision-making process as it navigates the conflicting forces of inflation and growth.
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