WASHINGTON – The Federal Reserve cut its key interest rate by a quarter of a percentage point on Wednesday. This is the third consecutive cut, which came with a cautionary tone about further cuts in the coming years.

In a move widely expected by markets, the Federal Open Market Committee cut its federal funds rate to a target range of 4.25% to 4.5%, back to the level seen in December 2022, when interest rates rose.

While the decision itself caused little concern, it was mostly about what the Fed would signal about its future intentions, given that inflation is consistently above target and economic growth is quite solid – conditions not normally associated with easing accompany monetary policy.

With the 25 basis point cut, the Fed indicated it would likely cut only twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future interest rate expectations. The two cuts suggested the committee’s intentions were halved when the act was last updated in September.

Assuming quarter-point increases, officials have announced two more cuts in 2026 and another in 2027. In the longer term, the committee expects the “neutral” key interest rate to be at 3%, 0.1 percentage points higher than in the September update, as the level has gradually fallen higher this year.

For the second time in a row, an FOMC member disagreed: Cleveland Fed President Beth Hammack wanted the Fed to maintain the current interest rate. Gov. Michelle Bowman voted no in November, the first time a governor voted against a tariff decision since 2005.

The fed funds rate determines what banks charge each other for overnight loans, but it also influences a variety of consumer debts such as auto loans, credit cards and mortgages.

There was little change in the post-meeting statement, apart from a change to the “magnitude and timing” of further interest rate changes, a minor language change from the November meeting.

The cut came even as the committee raised its forecast for full-year gross domestic product growth to 2.5%, half a percentage point higher than in September. However, officials expect GDP to slow to the long-term forecast of 1.8% in the following years.

Further changes to the summary of economic forecasts led the committee to cut its expected unemployment rate this year to 4.2%, while headline and core inflation, according to the Fed’s preferred measure, also fell to their respective estimates of 2.4% and 2.8%, slightly higher than the September estimate and above the Fed’s 2% target.

The committee’s decision comes as inflation not only remains above the central bank’s target, but also as the Atlanta Fed forecasts fourth-quarter economic growth of 3.2% and the unemployment rate hovers around 4%.

Although these conditions would be most consistent with the Fed raising or maintaining interest rates, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy. Despite macroeconomic data to the contrary, a Fed report earlier this month found that economic growth had increased only “slightly” in recent weeks, with signs of a decline in inflation and a slowdown in hiring.

Fed Chairman Jerome Powell has suggested that the rate cuts are an attempt to recalibrate monetary policy as it does not need to be so restrictive under current conditions.

With Wednesday’s move, the Fed has cut interest rates by a full percentage point since September, a month in which it took the unusual step of cutting by half a point. The Fed generally likes to move up or down in smaller quarter-point increments to weigh the impact of its actions.

Despite the aggressive downward moves, the markets have taken the opposite course.

Both mortgage rates and Treasury yields rose sharply over the period, perhaps indicating that markets do not believe the Fed can cut further. The yield on the policy-sensitive two-year Treasury note was last at 4.215%, in the upper range of the Fed’s rate hike on Wednesday.