Fed Delivers Third Rate Cut but Doubles Down on Fewer Moves for 2025

The Federal Reserve announced its third rate cut of the year on Wednesday, trimming the benchmark rate to 4.25 to 4.5 percent. However, officials now expect only two rate cuts in 2025, halving prior forecasts as inflation lingers above target levels.

Fed Cuts Rates for the Third Time This Year

Wednesday saw a 25 basis point drop in interest rates from the Federal Reserve, but the number of rate cuts anticipated for next year was cut in half. This was due to the fact that the fight to bring inflation down to the central bank's aim will likely take longer than anticipated, Investing.com reports.

To a range of 4.25 to 4.5 percent, the Federal Open Market Committee (FOMC) slashed its target rate by 25 basis points.

"Today was a closer call, but we decided it was the right call because we thought it was the best decision to foster achievement of both of our goals, maximum employment and price stability." Federal Reserve Chair Jerome Powell stated on Wednesday.

After cutting rates for the third time this year (the first being in September), Federal Reserve members seem to be backing away from a deep rate cut cycle and wagering on fewer cuts in the future.

Inflation Challenges Slow Path of Rate Cuts

After originally predicting four rate reductions in September, Fed members now anticipate the benchmark rate falling to 3.9% for next year, implying just two rate cuts. An increase from 2.9% in the previous projection brings the rates down to 3.4% in 2026. The prior forecast had rates at 2.9%; by 2027, they are projected to reach 3.1%.

The variables that Powell cited as contributing to the slowed pace of rate decreases include decreased negative risks for the labor market, uncertainty surrounding inflation, and higher economic growth in the second half of 2024.

A higher neutral rate, according to the Fed chief, means that interest rate decreases are getting closer to their eventual goal than previously thought. The Federal Reserve increased its long-term interest rate forecast from 2.9% to 3%.

"The economy grew faster in the second half of 2024 than we had expected, and is expected to be above our expectations," Powell stated, further noting that uncertainties around inflation influenced the Fed's decision-making process over future interest rate decreases.

Trump Administration’s Economic Policies Influence Projections

It seems like some Fed members' thoughts on the rate decrease forecast were influenced by the impending Trump administration, which is expected to implement inflationary policies.

"Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of fiscal policies into their forecast at this meeting," said Powell.

Members of the Federal Reserve expect inflation to achieve the 2% objective later than originally anticipated, due to sustained economic expansion and a better job market. This has led to a less aggressive path for rate cuts.

Stronger Growth and Labor Market Affect Inflation Outlook

The Federal Reserve's preferred inflation indicator, the core personal consumption expenditures price index, is expected to reach 2.5% in 2025, up from a previous prediction of 2.2% made in September. The earlier prediction for 2026 was 2.2%, but now it's expected to fall to 2.2%. By 2027, inflation will achieve the target rate of 2%.

Formerly predicted to be 4.4% in 2025, the unemployment rate is now more likely to climb to 4.3% and stay there through 2027.

Expectations for greater economic growth align with the labor market forecast. Fed members now project GDP at 2.1% for 2025, up from 2% earlier, and then decline to 1.9% in 2027, down from 2% previously.