The US Federal Reserve cut interest rates on Wednesday, with Chair Jerome Powell saying further cuts would depend on progress in curbing persistently high inflation.
Wall Street was jolted from here by Powell’s clear — and repeated — call for caution, sending stocks sharply lower and how much borrowing costs are likely to fall over the coming year, a return to market estimates. Encouraged.
“I think we’re in a good place, but I think it’s a new phase from here and we’re looking at more cuts,” Powell said at a press conference after the end of the Fed’s latest two-day policy meeting. Will be careful.” meeting
The Fed and Powell were widely expected to cut “hockey” rates in 2025 by halving the 100 basis points policymakers had projected three months earlier. But by the time Powell finished speaking, only a 25-basis-point cut for next year was reflected in market prices.
As expected, the Fed cut its policy rate by a quarter of a percentage point to a range of 4.25%-4.50%, a decision Powell described as a “close call,” noting that That the slower pace of rate cuts expected next year reflects higher inflation. Reading in 2024.
In fact, the decision to cut rates contradicted Cleveland Fed President Beth Hammick, who joined the central bank earlier this year and indicated she preferred to leave rates unchanged at this week’s meeting. will give
The central bank’s rate-setting Federal Open Market Committee said in its latest policy statement that “economic activity expanded at a solid pace” with the unemployment rate “remaining low” and inflation “remaining somewhat elevated.” have been”.
“In considering the extent and timing of additional adjustments to the target range … the Committee will carefully review the balance of risks, emerging data, and the emerging outlook,” it said in the new language that would cut rates. Establishes a potential interval for Beginning with the January 28-29 meeting.
US central bankers now project they will cut rates by just two-quarters of a percentage point by the end of 2025.
That’s a half-percentage-point decrease in policy easing next year that officials said was expected by September, with the Fed’s inflation estimates for the first year of the new Trump administration rising to 2.5% from their previous estimate of 2.1%. % are done. Above the central bank’s 2 percent target.
Slower progress on inflation, which does not return to the 2% target until 2027, translates into a slower pace of rate cuts and a slightly higher endpoint of 3.1%, which also hits in 2027, versus earlier ” Terminal” rate of 2.9% was seen till September.
Fed officials also raised their long-term neutral interest rate estimate to 3%.
“While the Fed chose to round out the year with a third straight cut, its New Year’s resolution appears to be for more gradual easing,” said Whitney Watson, global co-head and co-chief investment officer of fixed income. . Liquidity Solutions for Goldman Sachs Asset Management. “We expect the Fed to choose to skip the January rate cut, before resuming its easing cycle in March,” Watson added.
Trump’s Uncertainty
The new policy rate is now one percentage point below the peak reached in September, when officials concluded that inflation was likely to return to the 2 percent target and prolonged tightening of monetary policy posed risks to the job market. are
However, since then key measures of inflation have been largely sidelined, while persistently low unemployment and stronger-than-expected economic growth have fueled debate among policymakers about whether monetary policy is tight enough. As thought. Long-term estimates for the neutral rate ranged from 2.5% to 3.0% over the past year.
The Fed, which had raised rates aggressively in 2022 and 2023 to combat rising inflation, began its easing cycle in September with a half-percentage-point cut in borrowing costs. It cut rates by a quarter of a percentage point last month.
The latest quarterly estimates are the first since President-elect Donald Trump’s victory in the Nov. 5 election, which boosted the economic outlook amid campaign promises to cut taxes, raise tariffs, and crack down on illegal immigration. A new level of uncertainty was introduced into the vision. Aspects of which some analysts see as inflation.
Trump does not take office until Jan. 20, and Fed officials have said they cannot base monetary policy on campaign proposals that may or may not be enacted. Still, Powell said some policymakers considered “highly conditional estimates” of the impact of the incoming administration’s expected policies.
Fed staff are likely to be gaming different scenarios, and policymakers’ projections show growth of 2.1% next year to be above potential, inflation to remain above target for two more years, and The unemployment rate will never rise above 4.3%.