Federal Reserve officials on Dec. 18 approved a quarter-point interest rate cut, the third cut in as many meetings, but they projected only two additional cuts next year, half of what they forecast in September.
The Federal Open Market Committee lowered the federal funds rate to a range of 4.25% to 4.5% following its two-day meeting. The move comes after the committee in November approved a quarter-point cut, which followed a half-point cut in September.
But it did signal a slowdown in its rate cut strategy.
Its median projection for the federal funds rate at the end of 2025 is now 3.9%, up from a projected 3.4% in September, and 3.4% at the end up 2026, up from 2.9% projected in September.
“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Fed Chair Jerome H. Powell said at a news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
Powell reiterated that the central bank would continue lowering rates but isn’t on a preset course.
“We see ourselves as still on track to continue to cut,” Powell said. “I think the actual cuts that we make next year will not be because of anything we wrote down today; we’re going to react to data.”
When asked what the Fed will be looking for in order to cut rates further, Powell said additional progress on inflation as well as continued strength in the labor market.
Inflation has remained stubbornly above the Fed’s 2% target. The Bureau of Labor Statistics reported Dec. 11 that the consumer price index rose an annualized 2.7% in November from a year earlier, above the 2.6% figure recorded in October.
Separately, core personal consumption expenditures, or core PCE, the Fed’s preferred inflation gauge, rose 2.8% year-over-year in October, up from 2.7% year-over-year in September.
The committee's median projection for core PCE inflation by the end of 2025 is now 2.5%, up from 2.2% in September.
Eleven of the committee’s 12 members approved the quarter-point cut. Beth M. Hammack, president and CEO of the Cleveland Fed, favored maintaining the current rate.
Given the committee members’ updated projections, it’s no surprise they’re forecasting fewer cuts next year, said Jack McIntyre, portfolio manager for Brandywine Global Investment Management, in a statement.
“The results of this meeting raise the question: If the market wasn’t expecting a rate cut today, would the Fed actually have delivered one? I suspect not,” McIntyre continued. “Not surprisingly, there was a dissenter. Thus, the Fed has entered a new phase of monetary policy: The pause phase. The longer it persists, the more likely the markets will have to equally price a rate hike vs. a rate cut. Policy uncertainty will make for more volatile financial markets in 2025.”
Powell was asked how President-elect Donald Trump’s tariffs plans are impacting the Fed’s thinking, but the Fed chair said it’s too early to predict exactly what the tariffs will look like so the Fed hasn’t adjusted its forecasts or policies.
In response to a different Trump-related question, Powell said economic uncertainties are prevalent and with the economy on stable footing, the Fed will take a cautious approach.
“It’s kind of common-sense thinking that when the path is uncertain you go a little bit slower,” Powell said. “It’s not unlike driving on a foggy night or walking into a dark room full of furniture — you just slow down.”
The Fed’s next meeting is Jan. 28-29.
