The Federal Reserve has cut its target interest rate by 25 basis points, bringing the federal funds rate to a range of 4.25% to 4.5%. The move marks the Fed’s third consecutive rate cut since September, reducing rates by a total of 100 basis points over the period.
Fed Chair Jerome Powell described the decision as a “closer call” but said it was ultimately the “right call” in balancing the dual mandates of maximum employment and price stability. “We decided it was the best decision to foster achievement of both of our goals,” Powell said at a press conference following the announcement.
Cautious approach from here
Powell hinted at a more cautious approach to rate cuts in 2025, suggesting the bar for further reductions is now higher. “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 said. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
Powell indicated that future rate moves would be data-dependent and guided by incoming information about inflation and the economy. He drew an analogy, saying, “It’s not unlike driving on a foggy night or walking into a dark room full of furniture, you just slow down.”
The decision was not unanimous. Cleveland Fed President Beth Hammack voted against the rate cut, preferring to keep rates unchanged. Her dissent marks the second consecutive Federal Open Market Committee (FOMC) meeting to feature a dissenting vote, following a similar stance from Fed Governor Michelle Bowman at the September meeting.
A key element of Wednesday’s announcement was the Fed’s updated Summary of Economic Projections. The new forecasts show policymakers now expect just two rate cuts in 2025, compared to four cuts predicted in the September forecast.
The new projections place the federal funds rate at 3.9% by the end of 2025, up from the 3.4% level projected in September. This signals that Fed officials expect tighter financial conditions to persist for longer than initially anticipated.
David Mericle, Goldman Sachs’ chief US economist, noted: “The FOMC might worry that delivering too many cuts could look inappropriate in hindsight if tariffs boost inflation meaningfully and might therefore prefer to wait for clarity about what is coming.”
Resilient labour market, inflationary pressures
The broader economic context for the decision includes signs of ongoing resilience in the US labor market. Employers added an estimated 227,000 jobs in November, indicating steady demand for workers. Meanwhile, 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 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 that they now expect inflation to remain above 2% until 2026, a shift from their previous forecast of 2025.
Reaction
US stock markets responded negatively. The realisation that monetary policy would remain tighter for longer dampened investor sentiment.
For consumers, the reduction in the federal funds rate could lead to marginally lower interest rates on credit cards, auto loans, and certain types of variable-rate borrowing. However, mortgage rates — which are more closely linked to Treasury yields — have not followed the path of Fed rate cuts. Mortgage rates have actually increased, with the average 30-year fixed mortgage rate now at 6.75%, up from 6.67% the prior week.
What’s next?
While Powell remained optimistic about the economy’s trajectory, he emphasised the importance of patience as policymakers assess the effectiveness of recent rate cuts.
The next FOMC meeting in January is widely expected to result in a pause, with no change to the policy rate.
