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Key Takeaways
- As widely expected, the Federal Reserve lowered its key interest rate by a quarter of a percentage point to a range of 4.25% to 4.5%, its lowest since February 2023.
- A lower fed funds rate reduces borrowing costs on all kinds of loans, boosting the economy as the Fed tries to prevent a severe rise in unemployment.
- It was the third rate cut in as many meetings of the Fed’s policy committee, which began cutting rates from a two-decade high in September.
- The Fed indicated future rate cuts may be fewer and further between because inflation has stayed stubbornly above the Fed’s goal of a 2% annual rate.
The Federal Reserve just cut interest rates, but don’t get used to falling borrowing costs: they’re likely to stay where they are for at least the next couple of months.
As widely expected, the Fed’s policy committee lowered its influential federal funds rate by a quarter point Wednesday, bringing it to a range of 4.25% to 4.5%, the lowest since February 2023. It was the third time the Fed cut the rate this year, bringing it down from the two-decade high it had held for more than a year to push inflation down. The rate, which influences interest rates on all kinds of loans, remains higher than typical pre-pandemic levels, and Fed officials indicated it’s likely to stay that way for a while.
The Fed Could Be Pumping the Brakes in the New Year
FOMC members penciled in two quarter-point rate cuts for 2025 in their quarterly economic projections Wednesday, down from the four cuts they expected when they last made projections in September.
Analysts at Goldman Sachs said the projections suggest the Fed will hold its rate steady at its next meeting in January and not cut again until at least March.
“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing,” Whitney Watson, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, said in a commentary.
The Fed is calibrating how fast to cut rates to a range where they are neither stifling the economy nor boosting it, the so-called “neutral” rate. Given the recent data showing stubborn inflation, Fed officials indicated they’ll cut the rate more slowly than they previously anticipated.
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the committee said in a statement that was identical to its statement in November other than the addition of the phrase “extent and timing.”
Still Aiming for a Soft Landing
The rate cut was the latest maneuver in the Fed’s efforts to bring the economy in for a “soft landing” from the high inflation that spiked in late 2021 and early 2022. High interest rates were meant to discourage borrowing and cool the economy, at the risk of causing a recession and mass layoffs.
The Fed began cutting rates in September as inflation fell toward the Fed’s goal of a 2% annual rate, and the job market slowed. The cuts were meant to make it easier for employers to afford to hire and stop a recent pullback in job openings from turning into a rise in unemployment.
More recently, progress against inflation has stalled, prompting Fed officials to scale back their expectations for future rate cuts. One member of the Fed’s 12-member open market committee even dissented from the decision to cut rates Wednesday.
Beth Hammack, president of the Federal Reserve Bank of Cleveland, voted against the rate cut. It was the second dissent this year, following Fed governor Michelle Bowman, who in September voted against cutting the rate by a steeper-than-usual 50 basis points, preferring a 25-point cut instead.
