Fed delivers third rate cut this year, but cuts rate cut expectations in half for 2025 By Investing.com

Investing.com – The Federal Reserve cut interest rates by 25 basis points on Wednesday, but halved the number of rate cuts expected for next year, as the battle to bring inflation down towards the central bank’s target is now expected to take longer than previously expected. .

The Federal Open Market Committee decided to cut interest rates by 25 basis points to a range of 4.25% to 4.5%.

“Today was a closer decision, but we decided it was the right decision because we thought it was the best decision to advance the achievement of our two goals, maximum employment and price stability.” Federal Reserve Chairman Jerome Powell said on Wednesday.

In what was the third rate cut this year since the first cut in September, Fed members now appear to be turning away from a deep rate-cutting cycle, betting on fewer rate cuts in the future.

Fed members now see the key interest rate falling to 3.9% for next year, indicating just two rate cuts, compared to the previous forecast in September of four cuts. Rates are expected to fall to 3.4% in 2026, up from a previous forecast of 2.9%. Rates are expected to reach 3.1% by 2027, up from 2.9% previously.

Powell cited stronger economic growth in the second half of 2024, lower downside risks to the labor market as well as inflation uncertainty as factors contributing to a slower path of interest rate cuts.

The Fed Chairman also pointed to expectations that a rise in the neutral rate indicates that the eventual destination of interest rate cuts is closer than previously expected. The Fed raised its long-term interest rate forecast to 3% from 2.9% previously.

“The economy grew faster in the second half of 2024 than we expected, and is expected to be higher than our expectations,” Powell said, adding that inflation uncertainty also played a role in the Fed’s thinking about future interest rate cuts.

“I also note that we are approaching neutral, which is another reason to be cautious about further moves,” he added.

The incoming Donald Trump administration, with the expectation of inflationary policy, also appears to be creeping into some Fed members weighing expectations of rate cuts.

“Some people have taken a very tentative step and begun to incorporate very conditional estimates of the economic impacts of fiscal policies into their forecasts at this meeting,” Powell said.

The shallow path to rate cuts comes as Fed members expect inflation to reach the 2% target later than previously expected amid continued economic growth and a stronger labor market.

The core personal consumption expenditures price index, the Fed’s preferred measure of inflation, is expected to reach 2.5% in 2025, up from a previous forecast in September of 2.2%. For 2026, inflation is expected to slow to 2.2%, up from the previous estimate of 2.2%, and then reach the 2% target by 2027.

The unemployment rate is now expected to rise to 4.3% in 2025, down from the previous estimate of 4.4%, and to remain at that level until 2027.

The labor market outlook coincides with expectations of stronger economic growth, with Federal Reserve members now forecasting GDP to reach 2.1% for 2025, compared to 2% previously, before eventually falling to 1.9% in 2027, down from 2%. % previously.