The Federal Reserve cut its target interest rate by 25 basis points, bringing the federal funds rate to a range of 4.25% to 4.5%. This is the Fed’s third consecutive rate cut since September, reducing rates by a total of 100 basis points over the period.
Fed Chairman Jerome Powell called the move a “tighter decision” but said it was ultimately the “right decision” to balance the dual mandate of maximum employment and price stability. “We decided this was the best decision to further both of our goals,” Powell said at a news conference after the announcement.
Cautious approach from here
Powell hinted at a more cautious approach to rate cuts in 2025, suggesting the bar for further cuts is now higher. “With today’s action, we lowered our policy rate by one percentage point from its peak, and our policy is now significantly less restrictive,” Powell said. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
Powell said future rate movements would be data-dependent and guided by incoming information on inflation and the economy. He made an analogy saying, “It’s not unlike driving on a foggy night or walking into a dark room full of furniture, you just have to slow down.”
The decision was not unanimous. Cleveland Fed President Beth Hammack voted against cutting rates, preferring to keep rates unchanged. His dissent marks the second consecutive meeting of the Federal Open Market Committee (FOMC) to feature a dissenting vote, following a similar position by Fed Governor Michelle Bowman at the September meeting.
A key part of Wednesday’s announcement was the updated summary of the Fed’s economic projections. The new forecasts show that policymakers now expect only two rate cuts in 2025, compared to four reductions predicted in September’s forecast.
The new projections put the federal funds rate at 3.9% by the end of 2025, up from the 3.4% level projected in September. This indicates that Fed officials expect tighter financial conditions to persist longer than initially expected.
David Mericle, Goldman Sachs’ chief U.S. economist, noted: “The FOMC may be concerned that cuts that are too deep may appear inappropriate in hindsight if the tariffs significantly boost inflation and may therefore prefer to wait clarification on what’s coming. »
Resilient labor market, inflationary pressures
The broader economic context of this decision includes signs of continued resilience in the U.S. labor market. Employers added about 227,000 jobs in November, indicating stable demand for workers. At the same time, inflation remains above the Fed’s 2% target. The core personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, was at 2.3% in October, close to the target. Consumer Price Index (CPI) data showed inflation rose to 2.7% in November, up from 2.6% in October.
Fed officials noted that inflation remains “somewhat elevated” and they now expect it to remain above 2% through 2026, a change from their previous forecast of 2025 .
Reaction
US stock markets reacted negatively. The realization that monetary policy would remain tighter for a longer period dampened investor confidence.
For consumers, the reduction in the federal funds rate could result in slightly lower interest rates on credit cards, auto loans and some types of adjustable-rate loans. However, mortgage rates – which are more closely tied to Treasury yields – have not followed the trajectory of the Fed’s rate cuts. Mortgage rates have actually increased, with the average 30-year fixed mortgage rate now at 6.75%, up from 6.67% the week before.
What’s next?
Although Powell remains optimistic about the economy’s trajectory, he stressed the importance of patience as policymakers evaluate the effectiveness of recent rate cuts.
The next FOMC meeting in January is generally expected to result in a pause, with no change in the policy rate.
