Federal Reserve cuts interest rates by 0.25 percentage points, but projects fewer reductions in 2025
The Federal Reserve on Wednesday announced its third consecutive interest rate cut of 2024, reducing its benchmark rate by 0.25 percentage points amid cooling inflation. Yet in a blow for borrowers, the central bank also projected that it will loosen rates less next year than previously expected.
The Fed lowered the federal funds rate — the interest rate banks charge each other for short-term loans — to a range of 4.25% to 4.5%, down from its previous target range of 4.5% to 4.75%. The decision comes after policymakers slashed rates by 0.5 percentage points in September, followed by a 0.25 percentage point drop in November.
The Fed has now trimmed rates by 1 percentage point since September, offering relief to Americans carrying credit card balances and other debt.
Fewer rate cuts in 2025
At the same time, the Fed is now penciling in only two rate cuts in 2025, down from the four it had forecast in September when it last issued economic projections. The central bank is now projecting that the federal funds rate may sit at median level of 3.9% by the end of 2025, up from its earlier forecast of 3.4%.
The Fed is also projecting inflation could be higher in 2025, at 2.5%, than it had expected in September, when it forecast that price increases would slow to 2.1% next year.
“I would say today was a closer call, but we decided it was the right call” to cut rates, Federal Reserve Chairman Jerome Powell said at a Wednesday press conference when asked about the Fed’s decision. “The slower pace of cuts for next year reflects the higher inflation readings we’ve had this year.”
The Fed might opt to skip a rate cut in January, while resuming easing at its March meeting, said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, in an email.
“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing,” Watson said.
The rate cut, which was expected, was the “least important component” of today’s Fed meeting, noted Jack McIntyre, portfolio manager at Brandywine Global, in an email. Instead, Wall Street was focused on the Fed’s forecasts for 2025 and beyond, with the central bank’s new forecasts signaling the Fed has entered “a new phase of monetary policy, the pause phase,” McIntyre added.
The Fed’s battle against inflation
Wednesday’s move marks the Fed’s final interest rate decision prior to President-elect Donald Trump’s Jan. 20 inauguration. While price increases have cooled from their June 2022 peak, opening the door to Fed rate cuts this year, inflation has remained sticky and well above the Fed’s 2% annual target.
Consumer prices in November rose 2.7% on a yearly basis, fueled by elevated housing and food costs. Given that stubborn inflation, many analysts think the Fed is likely to make fewer rate cuts in 2025 amid concerns that could cause the economy to overheat.
Still, the Fed has so far defied forecasters’ warnings that its rate hikes could trigger a recession.
The Fed’s first rate meeting of 2025 is scheduled for Jan. 28-29, or after Trump’s inauguration. About eight in 10 economists expect the Fed to hold rates steady at that meeting, according to financial data firm FactSet.
