The Federal Reserve announced a quarter-point cut in its benchmark interest rate on Wednesday, an attempt to keep a seemingly stable but slowing economy stable.

It is the central bank’s third rate cut in 2024. The move lowers the Fed’s key interest rate to between 4.25% and 4.5%.

In its statement announcing the rate cut, the Fed now forecasts only two rate cuts for 2025. It said the unemployment rate remains low while the inflation rate remains “somewhat elevated.” A separate document released by the Fed on Wednesday now suggests that central bankers do not believe they will hit their 2% inflation target before 2026.

Economists surveyed by Bloomberg had expected three cuts next year, assuming the economy and price growth had cooled further by now.

The Fed’s actions are intended to prevent the economy from overheating when growth is strong or slipping into recession when growth is slow. To do this, it changes what is known as the federal funds rate, which helps set lending rates throughout the rest of the economy. By making it easier—or more difficult—to borrow money, the Fed attempts to control the pace of economic growth.

At the moment there is a heated debate about which of these is more likely to happen in the future.

Currently, the inflation rate remains well below its post-pandemic highs. But last week, the Bureau of Labor Statistics reported that the 12-month consumer price index (the most widely watched indicator of inflation) rose 2.7% in November – higher than the previous month’s 2.6%.

Consumers seem unimpressed. On Tuesday, the Census Bureau reported that retail sales rose 0.7% in the same month, above forecasts of 0.6%, while the October figure was revised to 0.5% from 0.4%.

These data points suggest that the economy remains on relatively stable footing, but there are some warning signs about underlying weaknesses — something that would justify the looser monetary policy that the Fed, not to mention President-elect Donald Trump, has pursued.

Most worrisome is the labor market, where job growth is largely concentrated in sectors such as health care and state and local government. These sectors typically say little about where we are in the economic cycle.

Meanwhile, the pace of employment growth in sectors that typically indicate sustained growth, such as manufacturing, business and professional services, has all but stalled.

Overall, hiring rates have fallen sharply while job openings continue to decline.

Finally, some stock indices are pulling back from their all-time highs after an incredible upward trend for most of 2024. The Dow Jones Industrial Average was in the middle of one Nine-day losing streak, worst multi-day performance since the 1970s.

Currently, market participants are overwhelmingly convinced that the Fed, after announcing its quarter-percentage cut in December, will take a “pause” at its January meeting and keep interest rates stable to assess how the overall financial situation is developing developed.

Most analysts remain relatively optimistic about the current situation. A new Bank of America survey finds the Fed is still likely to create a “soft landing” for the U.S. economy in which unemployment and inflation remain relatively low.

However, according to analysts at Goldman Sachs, inflation is now likely to have fallen even more, at the expense of slightly higher unemployment.

“The unemployment rate is no longer rising as quickly” as it was earlier this fall, these analysts said in a chart included in a recent note to clients. Still, they said, “it is still too early to conclude that overall labor market data has stabilized convincingly.”

Even as the labor market remains unstable, Federal Reserve officials have signaled they may want to slow the pace of cuts soon – not only in response to persistent inflation but also amid uncertainty over the new Trump administration’s tariff policies.

To illustrate the Fed’s thinking, Goldman analysts pointed to a speech this month by Beth Hammack, president of the Federal Reserve Bank of Cleveland, in which she laid out the state of play.

“Robust growth, a healthy labor market and still high inflation suggest, in my view, that it remains appropriate to maintain a moderately restrictive monetary policy stance for some time to come,” Hammack said. “Such a political course will help bring inflation back to 2 percent in a timely and sustainable manner.”

There has also been a broader rethinking of whether interest rates need to be higher across the board given possible structural changes in the economy that have led to faster growth, such as large budget deficits and increased productivity growth.

While the 2008 financial crash set the stage for more than a decade of low interest rates, Hammack said, “some of the forces that seemed to keep the neutral interest rate depressed after the global financial crisis may have finally run their course or reversed.”

The mood among investors and economists has also become more uncertain about what impact the Trump administration will have on the economy. In particular, fears that tariffs could increase prices are widespread.

“When it rains, it rains on everyone,” Costco CFO Gary Millerchip said on the company’s most recent earnings call.

Still, the base case appears to be going relatively smoothly, largely thanks to Trump’s pro-business agenda. The Bank of America survey found not only that 33% of respondents expect an eight-month high for the economy to continue growing steadily, but only 6% expect a recession scenario – a six-month low. Meanwhile, overall investor sentiment remains “super bullish,” with fund allocation to stocks at highs and cash at lows on hopes of continued consumption and cheaper financing after Trump takes office.

Ironically, when sentiment reaches this level, it is usually a sell signal, Bank of America’s note said.