Key Takeaways:
– The Federal Reserve (Fed) cuts its key interest rate by a quarter percentage point, marking the third consecutive reduction.
– The rate was adjusted back to 4.25%-4.5%, same as in December 2022.
– Changes following closely watched “dot plot” suggest only two more cuts in 2025 and pervasive caution about future adjustments.
– Cleveland Fed President Beth Hammack voted against the rate cut, favoring maintaining the previous level.
– The post-meeting statement hinted at a slower pace of rate cuts in the future.
– The Fed revised the full-year 2024 projection for gross domestic product (GDP) growth to 2.5%.
– Future policy actions are expected to be influenced by President-elect Donald Trump’s fiscal plans.
Interest Rate Cut Amidst Warnings
The Federal Reserve (Fed) announced a reduction in its key interest rate by 0.25% on Wednesday. This action marked the third consecutive rate cut, further echoing a cautionary note on future reductions. The Federal Open Market Committee reduced the overnight borrowing rate to a target range of 4.25%-4.5%, a level akin to that seen in December 2022 during a phase of growing rates.
Despite the absence of suspense in the rate cut decision, the anticipation hinged on the signal from the U.S. central bank on its future course of action. These future actions will reflect a scenario where inflation hovers above target levels while the economy experiences solid growth. Such conditions typically aren’t conducive to rate cuts.
Slow and Steady Future Actions
As the 0.25% cut was announced, the Federal Reserve hinted at only two more potential reductions in 2025. This forecast is a derivative of the “dot plot” or the guideline chart that provides insight into future rate expectations of individual committee members. According to this chart, the two projected cuts would halve the committee’s intentions compared to the plot updated last in September 2022.
By 2026 and 2027, officials expect two and one more reductions respectively, assuming quarter-point increments. The Fed envisions the long-term “neutral” funds rate to settle at 3%, a 0.1% escalation from the last update in September as levels have gently climbed throughout the year.
Fed Chair’s Perspective
Following Wednesday’s decisions, Jerome Powell, Chair of the Federal Reserve, shared, “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.”
Powell reiterated the cautious approach of the Fed while considering future adjustments to the policy rate. “Today was a closer call but we decided it was the right call,” expressed Powell. Stocks witnessed a sell-off post-Fed announcement and Treasury yields surged. The outlook for 2025 cuts dialed down to a quarter-point reduction according to the CME Group’s FedWatch measure.
Vote of Dissent
The FOMC meeting elicited a dissenting vote for the second consecutive time from Cleveland Fed President, Beth Hammack, who favored maintaining the previous rate. This was reminiscent of Governor Michelle Bowman’s dissent in November; the first time a governor had voted against a rate decision since 2005.
Fed’s Influence on Consumer Debt
The actions of the Fed not only set the overnight lending charges amongst banks but also impact various consumer debt elements. These include auto loans, credit cards, and mortgages. The post-meeting statement highlighted potential future rate changes, hinting at a slower pace of rate cut, a minor shift in expression from November.
Revised Economic Outlook
The decision to clip rates arrived despite the committee revising its projection for 2024 GDP growth to 2.5%. This figure is half a percentage point higher than what was forecasted in September. However, officials anticipate a slowdown in GDP growth in the years to follow, settling down to long-term estimates of 1.8%.
Concerning unemployment rates, the Fed expects this year to close with a figure of 4.2%, whereas the headline and core inflation experienced a slight surge from the September estimate. Despite being higher than the Fed’s 2% target, these values are regarded as consistent with an economy where the unemployment rate is low and the GDP growth rate is a strong 3.2% in the fourth quarter.
The Road Ahead
The focus shifted to the measures the Fed will undertake to ensure the economy doesn’t unnecessarily slow down, despite robust macro data. Additionally, the Fed will be expected to manage the impact of fiscal policies under President-elect Donald Trump. These policies related to tariffs, tax cuts, and mass deportations are projected to increase inflation and complicate the central bank’s responsibilities.
The rate cuts are significant steps in calibrating policy to suit current economic conditions. Chair Jerome Powell stated, “We think the economy is in [a] really good place. We think policy is in a really good place.” The full announcement highlighted normalizing policy, with the Federal Reserve trimming benchmark rates by a complete percentage point since September. These steps signify a focus on smaller quarter-point increments as the Fed measures the effect of its actions. However, the financial market responded with a surge in mortgage rates and Treasury yields, indicating that further cuts might be challenging for the Fed.