Federal Reserve Chairman Jerome Powell speaks during a news conference on Wednesday, Dec. 18, in Washington, D.C. Powell announced that the Federal Reserve is lowering interest rates by one-quarter of 1 percentage point to a range of 4.25% to 4.5%. (Photo by Alex Wong/Getty Images)
The Federal Reserve signaled that it will move more slowly and cautiously next year as it considers further rate cuts.
The Fed cut its benchmark rate one-quarter of 1 percentage point on Wednesday, to between 4.25% and 4.5%, in line with economists’ expectations, despite measures of inflation moving up in recent months. Cleveland Fed President Beth Hammack dissented in favor of a pause in rate changes.
The Fed’s economic projections for the rate next year changed from 3.4% in September to 3.9%, and the central bank revised its expectations for inflation from 2.1% to 2.5%, suggesting it sees a tougher battle ahead over inflation in 2025. The Fed makes its next rate announcement on Jan. 29.
“The slower pace of cuts next year reflects both higher inflation readings we had this year and the expectation readings will be higher,” Fed Chair Jerome Powell said during a news conference on Wednesday.
Some economists and policy analysts argued earlier this year that the Fed should continue cutting rates in response to cooling inflation after raising them aggressively in a campaign that began in March 2022. This key rate influences credit card rates and mortgage rates, which have an effect on business growth and individuals’ economic security. The Fed raised rates 11 times until the latter half of 2023.
But inflation — the Consumer Price Index, or CPI, in particular — has stalled a bit in its progress toward the Fed’s goal of 2% inflation. On Dec. 11, the Bureau of Labor Statistics released the November CPI, which rose 2.7% over the past year compared to 2.6% in October and 2.4% in September. Food prices also rose in November, while the rate of shelter price increases fell slightly over the month.
The Fed’s preferred gauge of inflation, the Personal Expenditures Consumption index, or PCE, will be released on Friday, giving the Fed more information on the state of inflation. The PCE fell three consecutive times until October, when it rose to 2.3%.
Kitty Richards, senior fellow at the Groundwork Collaborative, a left-of-center think tank, said changes in inflation don’t justify a major change in course for the Fed. It should focus on normalizing rates, she said, which would make it easier for people to buy homes or get car loans.
“The Fed thankfully did not throw millions of people out of work with its historic rate-hiking campaign, but it slowed the labor market and taxed away worker’s wage growth through higher borrowing costs,” she said in an emailed statement.
The incoming Trump administration’s policy agenda will eventually help shape Fed policy, including tariffs and deportation of immigrants, which some experts say will raise prices from lumber to tech. In November, Powell said he wouldn’t “speculate” on Trump’s likely policy decisions. However, the Fed did consider the possible effects of the first Trump administration on the economy eight years ago.
On Wednesday, Powell said some Fed officials considered possible policy changes as part of their economic forecast. “Some did identify policy uncertainty” and “more uncertainty around inflation,” he said.
Powell compared the path forward for the Fed to “driving on a foggy night” and said it makes sense to move slower when there are more unknowns.
Andrew Korz is an executive director in investment research at FS Investments, a global alternative asset manager headquartered in Philadelphia. He said the Fed emphasized caution, which means a slower path for cutting rates.
“If you listen to Powell he keeps using the words ‘cautious’ and ‘careful’ moving forward … I think he made it pretty clear uncertainty is higher, because we expect some big sea changes,” he said.
Mark Zandi, chief economist of Moody’s Analytics, said on Tuesday that potential policy changes from the Trump administration are going to be a factor in the Fed’s consideration of future rate cuts.
“If economic policy next year wasn’t an issue, I don’t think the Fed would change policy as a result of these sticky inflation numbers because the service side of the economy, which is where they’ve been most focused, is actually improving,” Zandi said. “You can see that in the cost of housing that has moderated more significantly.”
Korz said although today’s Fed announcement and press conference isn’t necessarily bad news for people looking to buy a home, it isn’t really good news either.
“By and large, the Fed sees it taking longer to get inflation to where it needs to be, and the rate-cutting cycle is going to take longer because of that and will stay higher for longer, which will keep mortgage rates elevated,” he said. “That is going to keep housing affordability tough, and I think is going to put a cap on the amount of construction we can do both in single-family and multi-family [homes] which is the crux of how we can get out of this affordability crisis we’re in.”
Economists say the strong November jobs report, in which employers added 227,000 jobs, shouldn’t be an issue for the Fed to start rethinking interest rate cuts, because the growth doesn’t look like it would spur inflation.
“I think the labor market is strong for full employment,” Zandi said. “But I think it has cooled off meaningfully from where we were 12 to 18 months ago, and I don’t sense any re-acceleration in job growth or wage growth or other things that they would be looking at.”
Powell echoed this in Wednesday’s press conference.
“Downsides to the labor market do appear to have diminished, and the labor market is now looser than pre-pandemic, so far in a gradual and orderly way. We don’t think we need further cooling in the labor market to get to 2%,” Powell said.
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