The Federal Reserve implemented its third consecutive rate cut of 2024 on Wednesday, reducing its key interest rate by 0.25 percentage points to a target range of 4.25%-4.5%. While this move was largely anticipated by financial markets, it came with a shift in the central bank's outlook for future rate reductions, signaling a more cautious approach heading into 2025.
"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 Powell said during his post-meeting press conference. "We can therefore be more cautious as we consider further adjustments to our policy rate."
The Fed's Summary of Economic Projections revealed that policymakers now expect only two additional rate cuts in 2025, down from the four cuts indicated in their September projections. Assuming quarter-point reductions, officials also anticipate two more cuts in 2026 and one in 2027. The "neutral" federal funds rate-seen as neither stimulating nor restricting economic growth-was revised slightly higher to 3%, reflecting the central bank's evolving long-term outlook.
Despite Powell's measured tone, the Federal Open Market Committee (FOMC) vote was not unanimous. Cleveland Fed President Beth Hammack dissented, preferring to keep rates steady. Her objection followed a similar dissent in November by Governor Michelle Bowman, marking two instances of internal division during this rate-cutting cycle.
The decision to cut rates comes as the U.S. economy continues to defy expectations. GDP growth for the fourth quarter is projected at 3.2% by the Atlanta Fed, while unemployment remains near 4%. However, inflation remains stubbornly above the Fed's 2% target. The Consumer Price Index (CPI) showed an annual increase of 2.7% in November, with core inflation-excluding food and energy-rising 3.3% year-over-year.
"Today was a closer call, but we decided it was the right call," Powell acknowledged, referencing the complex interplay of robust economic growth and persistent inflation.
The Fed's latest move marks a stark contrast to the aggressive rate hikes implemented in 2022 and 2023 as part of its campaign to combat soaring inflation. Over the past few months, policymakers have shifted their focus to recalibrating monetary policy to avoid unnecessary economic slowdowns.
"We think the economy is in really good place. We think policy is in a really good place," Powell stated, underscoring the Fed's confidence in its current strategy.
However, financial markets have reacted cautiously to the central bank's recent actions. Stocks sold off following the announcement, while Treasury yields surged. The policy-sensitive 2-year Treasury yield rose to 4.3%, surpassing the upper bound of the Fed's new target range. Mortgage rates and other consumer borrowing costs have similarly edged higher, suggesting skepticism among investors regarding the Fed's ability to deliver further cuts.
The rate cut also comes amid evolving fiscal dynamics. Policymakers face the potential inflationary impact of fiscal initiatives under President-elect Donald Trump, including proposed tax cuts and tariffs. These measures could further complicate the Fed's task of balancing economic growth with price stability.
Looking ahead, Powell and other Fed officials emphasized that future policy adjustments would depend on incoming economic data and the evolving balance of risks. "In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks," the FOMC stated.
