The Fed cut the interest rate by a quarter point

WASHINGTON — The Federal Reserve cut its key interest rate by a quarter percentage point on Wednesday, the third cut in a row, with a tone of caution about further cuts in coming years.

In a move widely expected by markets, the Federal Open Market Committee cut the overnight borrowing rate to a target range of 4.25% to 4.5%, returning rates to a higher range in December 2022.

While there was little intrigue about the decision itself, the main question was what the Fed would signal about its future intentions, given that inflation has remained consistently above target and economic growth has been fairly robust, conditions that do not usually coincide with policy easing.

Read it What changed in the Fed’s statement.

In introducing the 25-basis-point cut, the Fed said it would only cut rates twice as low in 2025, based on a closely watched “point plan” matrix of individual members’ future interest rate expectations. When the plot was last updated in September, two cuts cut half of the committee’s intentions.

Assuming quarter-point increases, officials have forecast two more cuts in 2026 and another in 2027. Over the longer term, the committee sees the “neutral” funds rate at 3%, up 0.1 percentage point from the September update as the rate gradually declines. higher this year.

“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,” said Chairman Jerome Powell. press conference after the meeting. “Therefore, we may be more cautious when considering further adjustments to our policy rate.”

“It was a closer call today, but we decided it was the right call,” he said.

Stocks sold off after the Fed announcement as Treasury yields rose.

For the second meeting in a row, one FOMC member dissented: Cleveland Fed President Beth Hammack wanted the Fed to keep interest rates unchanged. Governor Michelle Bowman voted against a governor’s rate decision in November for the first time since 2005.

The fed funds rate determines what banks charge each other for an overnight loan, but it also affects various types of consumer debt, such as car loans, credit cards and mortgages.

The post-meeting statement, a tweak on the “scope and timing” of additional rate changes, was little changed from the November meeting except for a slight change in language.

The decline came despite the committee raising its full-year gross domestic product growth forecast to 2.5%, half a percentage point higher than in September. However, officials expect GDP to slow to a long-term forecast of 1.8% in the coming years.

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Other changes to the Summary of Economic Projections lowered the committee’s expected unemployment rate this year to 4.2%, while headline and core inflation, the Fed’s preferred measure, rose to slightly higher estimates of 2.4% and 2.8%. Above the September estimate and the Fed’s 2% target.

The committee’s decision comes as inflation remains above the central bank’s target, but the Atlanta Fed forecast the economy to grow at 3.2% in the fourth quarter and the unemployment rate to remain around 4%.

Although these conditions are most consistent with the Fed hiking or keeping interest rates on hold, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had picked up only “slightly” in recent weeks, with signs of inflation easing and hiring slowing.

Moreover, the Fed will have to deal with the impact that fiscal policy under President-elect Donald Trump, who has announced plans for tariffs, tax cuts and mass deportations, could cause inflation across the board and complicate the central bank’s job.

Powell noted that the rate cut is an effort to recalibrate policy because it doesn’t need to be as restrictive under current conditions.

“We think the economy is in a really good place. We think the politics are in a really good place,” he said Wednesday.

With Wednesday’s move, the Fed will cut its benchmark rates by a full percentage point since September in a month of unusual action. The Fed generally likes to move up or down in smaller quarterly increments as it gauges the impact of its moves.

Despite the lower aggressive moves, the markets reversed course.

Mortgage rates and Treasury yields both rose sharply over the period, perhaps indicating that markets don’t believe the Fed can do more tapering. The policy-sensitive 2-year Treasury yield rose to 4.3%, topping the Fed’s interest rate.

In a related move, the Fed adjusted the rate it pays on the overnight repo facility to the lower end of the federal funds rate. The so-called ON RPP rate is used as a baseline for the stock rate, which moves toward the lower end of the target range.