The Federal Reserve on Wednesday announced its third straight rate cut of 2024, cutting its benchmark interest rate by 0.25 percentage points as inflation eased. But in a blow to borrowers, the central bank also predicted that it will ease interest rates less next year than previously expected.
The Fed lowered the federal funds rate — the interest banks charge each other for short-term loans — to a range of 4.25% to 4.5%, down from the previous target of 4.5% to 4.75%. The decision comes after policymakers cut interest rates 0.5 percentage points in Septemberfollowed by one A decrease of 0.25 percentage points in November.
The Fed has now cut interest rates by 1 percentage point since September, providing relief to Americans with credit card balances and other debt.
Fewer interest rate cuts in 2025
At the same time, the Fed now plans just two rate cuts in 2025, fewer than the four it forecast in September when it last published economic forecasts. The central bank now predicts that the Federal Funds Rate will average 3.9% by the end of 2025, up from its previous forecast of 3.4%.
The Fed also expects inflation in 2025 could be higher, at 2.5%, than it expected in September, when it forecast price increases would slow to 2.1% next year.
“I would say it was a closer call today, but we decided it was the right decision” to cut rates, Federal Reserve Chairman Jerome Powell said at a news conference Wednesday when asked about the decision. Fed. “The slower pace of cuts for next year reflects the higher inflation rates we have had this year.”
The Fed could choose to skip a January rate cut while resuming easing at its March meeting, says 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 has opted to end the year with a third consecutive rate cut, the resolution for the new year appears to be a more gradual pace of easing,” Watson said.
The expected rate cut was the “least important part” of today’s Fed meeting, Jack McIntyre, portfolio manager at Brandywine Global, said in an email. Instead, Wall Street focused on the Fed’s forecasts for 2025 and beyond, with the central bank’s new forecasts indicating that the Fed has “entered a new phase of monetary policy, the pause phase,” McIntyre added.
The Fed’s Fight Against Inflation
Wednesday’s move marks the Fed’s final interest rate decision ahead of President-elect Donald Trump’s inauguration on January 20. While price increases have cooled from their June 2022 peak, opening the door for Fed rate cuts this year, inflation has remained stubborn and well above the Fed’s annual target of 2%.
Consumer prices rose in November 2.7% annuallyfueled by higher housing and food costs. Given persistent inflation, many analysts believe the Fed is likely to make fewer rate cuts in 2025 amid concerns that the economy could overheat.
Yet the Fed has so far ignored forecasters’ warnings that its rate hikes could trigger a recession.
The Fed’s first interest rate meeting of 2025 is scheduled for January 28 and 29, or after Trump’s inauguration. About eight in 10 economists expect the Fed to keep rates steady at that meeting, according to financial data firm FactSet.
