The Federal Reserve reduced its key interest rate by a quarter percentage point on Wednesday, marking the third consecutive cut. The move was made with a cautious tone regarding potential future cuts in the coming years. The Federal Open Market Committee lowered the overnight borrowing rate to a target range of 4.25%-4.5%, returning to the level seen in December 2022 when rates were increasing.
While the decision was widely expected by the markets, the focus was on the Fed’s signal about its future intentions. Despite inflation being above target and solid economic growth, conditions not typically associated with policy easing, the Fed indicated it may only lower rates twice more in 2025.
Chair Jerome Powell stated that the policy rate has been reduced by a full percentage point from its peak, making the policy stance less restrictive. The stock market reacted sharply to the announcement, with the Dow Jones Industrial Average dropping over 1,100 points and Treasury yields rising. The Fed’s decision impacts various consumer debts such as auto loans, credit cards, and mortgages.
The post-meeting statement saw minimal changes, hinting at a slower pace of rate cuts ahead. The Fed raised its projection for full-year 2024 GDP growth to 2.5% but expects a slowdown in subsequent years. Unemployment rate projections were lowered for this year, while inflation estimates were revised higher.
Despite positive economic indicators, the Fed remains cautious about keeping rates too high and potentially slowing down the economy. The impact of President-elect Donald Trump’s fiscal policies, including tariffs and tax cuts, adds complexity to the central bank’s decision-making process.
Chair Powell emphasized that the rate cuts aim to adjust policy to current conditions, which are viewed as favorable. The Fed has cut benchmark rates by a full percentage point since September, with markets showing skepticism about further cuts. Mortgage rates and Treasury yields have risen, suggesting doubts about the Fed’s ability to continue cutting rates.
In a related move, the Fed adjusted the rate on its overnight repo facility to align with the lower end of the fed funds rate, serving as a floor for the funds rate.
