The Federal Reserve cuts interest rates by a quarter of a percentage point but signals a slowing pace of easing

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The Federal Reserve cut its benchmark interest rate by a quarter of a percentage point but signaled a slowdown in the pace of easing next year, sending the dollar higher and US stocks falling.

The Federal Open Market Committee voted on Wednesday to reduce federal funds an average To 4.25-4.5 percent, which is the third consecutive reduction. The decision was not unanimous, with Cleveland Fed President Beth Hammack casting a dissenting vote, favoring keeping interest rates steady.

Officials’ economic forecasts released alongside the interest rate decision pointed to smaller cuts than previously expected for 2025, highlighting policymakers’ concern that cutting borrowing costs too quickly could undermine efforts to cool price growth across the world’s largest economy. Policymakers also raised their inflation expectations.

Fed Chairman Jay Powell said that after Wednesday’s cut, the central bank’s policy settings have become “significantly less restrictive” and they can now be “more cautious” when they consider easing further. He also described the December decision as a “closer call” than in previous meetings.

Wall Street bank Morgan Stanley said the Fed’s forecast for 2025 was “much more hawkish than we expected.”

US government bond prices fell after the Fed’s decision, with the policy-sensitive two-year Treasury yield rising 0.08 percentage point to 4.33 percent. The dollar jumped 1 percent against a basket of six peers, while the Standard & Poor’s 500 index on Wall Street fell 1 percent.

In a sign that the Fed is preparing to move beyond interest rate cuts at upcoming meetings, the Federal Open Market Committee revised its language regarding future changes to its policy settings in a statement issued on Wednesday.

The Fed’s goal is to put enough pressure on consumer demand and business activity to make payments Economic inflation And a return to the US central bank’s 2 percent target without harming the labor market or the broader economy.

Officials now expect to cut the interest rate by half a percentage point next year to 3.75-4 percent, down from the full percentage point cut expected in the “point chart” in September. Four officials decided to make one additional reduction or no additional reductions next year.

Most saw the interest rate falling to 3.25-3.5 percent by the end of 2026, also higher than expectations three months ago.

They also raised their inflation forecasts once food and energy prices are reduced to 2.5 percent and 2.2 percent in 2025 and 2026 respectively, while they expected the unemployment rate to stabilize at 4.3 percent over the next three years.

“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully evaluate incoming data, evolving expectations, and the balance of risks,” she added.

Wednesday’s decision was not the first this year to be opposed by a Fed official, after Michelle Bowman expressed her opposition to a half-point cut in September. This was the first time the governor voted against the resolution since 2005.

Financial markets were widely expecting a quarter-point rate cut on Wednesday, but it came amid debate among officials over how quickly inflation would decline, after recent data indicated slow progress toward the 2 percent target. The core personal consumption expenditures price index, the Fed’s preferred measure of inflation that excludes food and energy prices, rose at an annual rate of 2.8 percent in October.

the Federal Reserve Bank The Fed began a new cycle of rate cuts in September with a large cut of half a percentage point, but concerns about the labor market have since subsided and the economic outlook has brightened. This healthy state of the American economy has led to a change in the calculations of officials as they try to settle on a “neutral” rate that does not restrict growth or push it higher than it should be.

The central bank described the latest cuts as a “recalibration” of policy that reflects its success in knocking inflation down from its peak of around 7 percent in 2022. But the barrier to future interest rate cuts is set to move higher over time as the interest rate rises. Estimates are close to neutral, especially if the economy maintains its strength

Fed officials once again raised their estimate for the long-term neutral interest rate, with a majority now expecting it to reach 3 percent. At this time last year, they estimated it was 2.5 percent.

The Fed meeting came just weeks before Donald Trump returns to the White House, after pledging to raise tariffs, deport immigrants, and cut taxes and regulations. Economists recently They were surveyed The Financial Times newspaper said that the policy mix could lead to a new wave of higher inflation and harm growth.

Additional reporting by Harriet Clarvelt in New York