The US Federal Reserve cuts interest rates but warns for next year Business and economic news

Slowing progress on inflation translates into a slower pace of interest rate cuts, especially as economic growth picks up.

The US Federal Reserve lowered interest rates, but indicated that it would slow the pace of decline in borrowing costs, given the relatively stable unemployment rate and the slight improvement in inflation recently.

The Federal Open Market Committee, which sets the central bank’s interest rate, said in its latest policy statement on Wednesday that “economic activity continued to expand at a solid pace” with the unemployment rate remaining “low” and inflation “moderately high.”

“When considering the extent and timing of additional adjustments to the target range… the committee will carefully evaluate incoming data, evolving expectations and the balance of risks,” it said in new language that paves the way for a possible pause in interest rate cuts starting at 10:00 GMT. Meeting January 28-29.

US central bankers now expect they will make only two quarter-point interest rate cuts by the end of 2025.

That’s half a percentage point lower in policy easing next year than officials expected as of September, with the Fed’s forecast for inflation in the first year of the new Trump administration jumping from 2.1% in their previous forecast to 2.5% now — well above the central bank’s forecast. The bank’s target is 2%.

“From this point forward, it is appropriate to proceed cautiously and look for progress on inflation… From now, we are in a place where the risks are balanced,” Federal Reserve Chairman Jerome Powell said in a press conference after the end of the central bank meeting. Two-day policy meeting

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

Slowing progress in inflation, which is not expected to return to the 2 percent target until 2027, translates into a slower pace of interest rate cuts.

Fed officials also raised their estimate for the long-term neutral interest rate – the level that is believed to neither stimulate nor hinder the economy – to 3%.

Lowering the benchmark interest rate to a range of 4.25% to 4.5% was opposed by Cleveland Fed President Beth Hammack, who preferred to leave the interest rate unchanged.

“While the Fed chose to close out the year with a third straight cut, its decision for the new year appears to be moving toward a more gradual pace of easing,” said Whitney Watson, Global Co-Head and Co-Head of Fixed Income and Investment Instruments. Goldman Sachs Asset Management Liquidity Solutions. “We expect the Fed to choose to skip the January rate cut, before resuming its easing cycle in March,” Watson added.

Trump’s uncertainty

The new interest rate is now a percentage point lower than the peak it reached in September when officials concluded that inflation was on track to return to the 2 percent target and that there were risks to the labor market from keeping monetary policy too tight for too long.

But key measures of inflation since then have moved largely sideways, while persistently low unemployment rates and stronger-than-expected economic growth have sparked debate among policymakers over whether monetary policy has been as tight as thought.

The latest quarterly forecast is the first since President-elect Donald Trump’s Nov. 5 election victory, which introduced a new level of uncertainty into the economic outlook given his campaign promises to cut taxes, increase tariffs and crack down on unauthorized immigration — aspects of the global economy. This is what analysts see Inflationary.

Trump will not take office until January 20, and Fed officials have said they cannot base monetary policy on campaign proposals that may or may not be enacted.

However, Fed staff are likely juggling different scenarios, and policymakers’ forecasts show growth will remain above potential at 2.1% next year, inflation will remain above target for another two years, and the unemployment rate never rose above 4.3%.