In its pursuit of achieving maximum employment and maintaining inflation at a consistent 2 percent in the long term, the Federal Reserve announced on Wednesday a decision that was widely anticipated: the further reduction of interest rates by a quarter of a percentage point.
The Fed's decision involves adjusting the target range for the federal funds rate by 25 basis points, bringing it down to 4.25 to 4.50 percent. This move echoes a similar rate cut that occurred in early November.
In its statement, the central bank characterized the economic outlook as "uncertain," noting that the risks to its dual mandate are "roughly balanced."
Given that the rate cut was largely expected, the spotlight of the announcement was on the Fed's latest economic projections. These projections indicate a reduced frequency of rate cuts next year, compared to earlier forecasts.
Current projections suggest that by the end of 2025, the interest rates will be within a range of 3.75 to 4.0 percent, which is a shift from the 3.25 to 3.50 percent range forecasted in September.
Assuming a quarter-point rate cut by the Fed, the projections suggest only two rate reductions next year, down from the previously anticipated four.
The anticipated reduction in rate cuts is attributed to Fed officials expecting inflation to surpass earlier estimates in 2025, with consumer price growth projected at 2.5 percent, an increase from the 2.1 percent forecast in September.
Additionally, Fed officials have adjusted their 2025 GDP growth forecast upwards to 2.1 percent from 2.0 percent, while revising the unemployment rate forecast downwards to 4.3 percent from 4.4 percent.
The Fed emphasized that it will meticulously evaluate incoming data, the changing outlook, and the balance of risks to determine any further adjustments to the federal funds rate's target range.
Interestingly, the decision to lower rates at this meeting was not unanimous, as Cleveland Fed President Beth M. Hammack expressed a preference to maintain the current rates.
The Federal Reserve's upcoming monetary policy meeting is set for January 28-29, with CME Group's FedWatch Tool currently suggesting an 88.5 percent likelihood that the central bank will opt to keep rates unchanged.
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