The Fed cuts rates but plans fewer in 2025

WASHINGTON- The U.S. central bank cut interest rates on Wednesday as expected, but Federal Reserve Chairman Jerome Powell said further reductions in borrowing costs now depended on further progress in reducing stubbornly high inflation. high – remarks that show that policymakers are beginning to take into account the prospects of radical economic changes. under a Trump administration.

Powell’s explicit – and repeated – references to the need to proceed with caution from here shook Wall Street, sending stocks sharply lower, bond yields higher and causing investors to downgrade their estimates of the likely decline in borrowing costs over the coming year.

“I think we’re in a good position, but I think from now on it’s a new phase and we’re going to be cautious about further reductions,” Powell said at a news conference after the meeting of the Federal Open Market Committee of the central bank. cut its benchmark interest rate by a quarter of a percentage point following a two-day meeting.

Federal Reserve Chairman Jerome Powell. AP PHOTO

Powell described at length how inflation has improved since its 2022 peak, as well as how it has disappointed by moving “sideways” in recent months, with housing costs in particular improving more slowly than this. that the Fed predicted.

While he said the Fed remained confident that price pressures would continue to ease, he also acknowledged that central bank staff and policymakers were beginning to think, at least preliminarily, about how President-elect Donald Trump’s promises of higher tariffs, tax cuts and tougher immigration policies would change the situation. perspectives.

In developing new projections, “some people took a very preliminary step and began to incorporate very conditional estimates of the economic effects of policies into their forecasts at this meeting,” Powell said of an outlook in which US central bankers anticipated a prospect of higher inflation and fewer rate cuts next year.

The index of policymakers’ risk sentiment around their projections also rose sharply for inflation, with a separate measure of uncertainty also increasing in a sharp change from the outlook released in September, before the presidential election American of November 5.

Powell said the changes were largely data-driven, but analysts saw the start of a reckoning with Trump’s policies that many believe are expected to worsen inflationary pressures.

The new projections show that officials expect the price index for personal consumption expenditures excluding food and energy costs, or core PCE, to be stuck at 2.5% through 2025, an improvement from to this year’s 2.8% but significantly above the Fed’s 2% target.

“Uncertainty and upside risks to core PCE inflation have increased sharply since September. This appears to largely reflect the potential impact of new government policies,” said Karim Basta, chief economist at III Capital Management.

A dissent

The Fed, which raised rates aggressively in 2022 and 2023 to combat a surge in inflation, began its easing cycle in September with a half-percentage-point reduction in borrowing costs , and followed up with a reduction of a quarter of a percentage point last month.

Ahead of this week’s meeting, the central bank was widely expected to make a “hawkish” rate cut, estimating about half the policy easing in 2025 compared to the 100 basis points projected by policymakers. decision-makers three months ago. But by the time Powell finished speaking, a single 25 basis point cut for next year was reflected in market prices.

This shift in perspective highlights some of the challenges Trump could face in delivering on key campaign promises, with tighter Fed policy likely to keep key consumer interest rates high, such as those home mortgages, and less improvement in inflation which would undermine its commitment to lower prices.

Powell even said that the decision to lower the policy rate to the range of 4.25 to 4.50 percent this time was a “tighter decision” than financial markets had suggested, which saw the cut as a near -certainty before the meeting.

The move sparked dissent from Cleveland Fed President Beth Hammack, who joined the central bank earlier this year and indicated she would have preferred to leave rates unchanged at this week’s meeting .

But Powell also made clear that the basic outlook is that the economy continues to perform well with continued growth, low unemployment and inflation that officials say is expected to decline slowly.

Rates will fall again once inflation shows evidence of rising further, with “the magnitude and timing of further adjustments to the target range” depending “on incoming data, the evolving outlook and the balance risks,” the Fed said in new language. This set up a likely pause in rate cuts from the January 28-29 meeting.

U.S. central bankers now predict they will make just two quarter-percentage-point rate cuts by the end of 2025.

That’s half a percentage point less in policy easing next year than officials forecast in September, with the Fed’s inflation projections for the first year of the new Trump administration dropping from 2. 1% in their previous projections to 2.5% in current projections.

Slower progress on inflation, which is not expected to return to the 2% target until 2027, translates into a slower pace of rate cuts and a slightly higher end point for rates at 3.1 %, which will also be reached in 2027, compared to the previous year. » “terminal” rate of 2.9 percent observed in September.

Trump’s uncertainty

The new policy rate is now one percentage point below the peak reached in September, when officials concluded that inflation was likely on the verge of returning to target and that there were risks to the interest rate market. work if an overly restrictive monetary policy was maintained for too long.

Key inflation measures have changed little since then, while low unemployment and stronger-than-expected economic growth have sparked debate among policymakers over whether monetary policy is as tight as it should be. we thought so.

Although Trump doesn’t take office until Jan. 20, Powell said Fed staff have considered different scenarios for what could be an unpredictable year.

“It is very premature to try to draw any conclusions. We do not know what will be taxed, from which countries, for how long and to what extent. We do not know if there will be tariffs of retaliation,” Powell said. “What the Committee is doing now is discussing pathways and understanding how tariffs can affect inflation.”