US Fed cuts interest rates, but warns for next year | Business and Economic News

Slower progress on inflation translates into a slower pace of interest rate cuts, especially at a time when economic growth is brisk.

The United States Federal Reserve has cut interest rates, but has signaled that it will slow the pace of further declines in borrowing costs, given the relatively stable unemployment rate and some recent improvement in inflation.

“Economic activity continued to expand at a robust pace,” with the unemployment rate “remaining low” and inflation “remaining somewhat elevated,” the central bank’s latest policy statement from the Federal Open Market Committee, which sets interest rates, said on Wednesday.

“Given the scope and timing of further revisions to the target range … the Committee will carefully assess incoming data, the evolving outlook and the balance of risks,” he said. January 28-29 meetings.

US central banks now forecast they will cut rates by just two quarters of a percentage point through the end of 2025.

That’s half a percentage point less than officials expected in September to ease policy next year, with the Fed’s inflation forecast for the first year of the new Trump administration rising to 2.5 percent from its previous forecast of 2.1 percent — well above the central benchmark. the bank’s target of 2 percent.

“From this point forward, it’s prudent to proceed with caution and look for progress on inflation … from here on out, we’re where the risks are in the balance,” Fed Chairman Jerome Powell said at a press conference after the end of the central bank’s tenure. two-day policy meeting

Powell described the latest rate cut as a “closer call” and noted that the slower pace of rate cuts projected next year reflects higher inflation in 2024.

Slower progress on inflation, which is not seen to return to the 2 percent target until 2027, translates into a slower pace of rate cuts.

Fed officials also raised their estimate of the long-term neutral interest rate — a level that neither boosts nor hinders the economy — to 3 percent.

A cut in the benchmark policy rate from 4.25 percent to a range of 4.5 percent was opposed by Cleveland Federal Reserve Bank President Beth Hammack, who favored keeping the policy rate unchanged.

“While the Fed would prefer to end the year with a third straight rate cut, its New Year’s resolution appears to be for a slower pace of easing,” said Whitney Watson, global co-chairman and chief investment officer for fixed income and fixed income liquidity solutions for Goldman Sachs Asset Management. Watson added that “we expect the Fed to favor a rate cut in January before resuming its easing cycle in March.”

Trump’s uncertainty

The new policy rate is now one percentage point below the peak reached in September, when officials concluded that inflation was safely on track to return to the 2 percent target and that keeping monetary policy too tight for too long posed risks to the labor market.

Since then, however, core measures of inflation have largely been on the sidelines, with continued low unemployment and stronger-than-expected economic growth fueling debate among policymakers about whether monetary policy is as tight as thought.

The latest quarterly projections are the first since President-elect Donald Trump’s Nov. 5 election victory, injecting a new level of uncertainty into the economic outlook given his campaign promises to cut taxes, raise tariffs and crack down on illegal immigration. as analysts see inflation.

Trump doesn’t take office until Jan. 20, and Fed officials have said they can’t base monetary policy on campaign proposals that have become law or not.

Still, Fed staff are likely working through a range of scenarios, with policymakers’ forecasts showing growth will remain above potential at 2.1 percent next year, inflation will remain above target for two more years and the unemployment rate will never rise above 4.3 percent.