The Federal Reserve announced its third interest rate cut this year, reducing the benchmark rate by a quarter-point to 4.3%. However, the central bank said it plans to slow the pace of rate reductions in 2025, projecting only two cuts next year, compared to the four it envisioned in September.
The Fed’s caution stems from persistent inflationary pressures and an economy that continues to grow robustly despite a series of earlier rate hikes.
Chair Jerome Powell explained the rationale behind the measured approach during a news conference.
“We’re closer to the neutral rate, which is another reason to be cautious about further moves,” Powell said, referring to the rate level that neither stimulates nor slows the economy.
Persistent Inflation and a Soft Landing
Inflation, as measured by the Fed’s preferred gauge, stood at 2.8% in October, well above the central bank’s 2% target. While the pace of inflation has eased from its peak of 7.2% in June 2022, policymakers remain wary of cutting rates too aggressively, fearing it could re-ignite price pressures.
Powell noted the Fed’s projections indicate core inflation coming down to 2.5% next year, marking significant progress but still short of the goal. “We and most other forecasters still feel that we are on track to get down to 2%. It might take a year or two from here,” Powell said.
Labor Market Signals
The labor market presents a mixed picture. While hiring has slowed, the unemployment rate remains historically low at 4.2%, even though it has risen nearly a full percentage point over the past two years. Powell emphasized that further cooling in the labor market is unnecessary for achieving the Fed’s inflation target.
“We don’t think we need further cooling in the labor market to get inflation below 2%,” he said.
Challenges Ahead
The decision to slow rate reductions comes amid broader uncertainty surrounding the economy. President-elect Donald Trump’s proposed tax cuts and potential tariffs add layers of complexity to the Fed’s policy outlook. Powell acknowledged that policymakers are still assessing how these factors might influence inflation and growth.
As the Fed transitions to this “new phase,” Powell reiterated the need for caution. “From here, it’s a new phase, and we’re going to be cautious about new cuts,” he concluded.
