The Fed is cutting interest rates by a quarter point and forecasts only two cuts in 2025

WASHINGTON – The Federal Reserve cut its benchmark interest rate by another quarter of a percentage point on Wednesday, but forecast a much slower pace of rate cuts next year due to a recent rise in inflation and strong economic growth.

Officials now expect just two rate cuts in 2025, compared to the four they had envisaged in September. Wednesday’s move marked the Fed’s third straight rate cut and brought its key short-term interest rate to a range of 4.25% to 4.5%. They also forecast stronger growth, higher inflation and a more robust labor market both this year and in 2025 – an outlook that appears to support fewer interest rate cuts.

President-elect Donald Trump’s promises to impose high import tariffs, restrict immigration and cut taxes could at least partially influence officials’ vision of higher inflation and growth next year, economists at Barclays and Goldman Sachs said.

Although Fed Chairman Jerome Powell has said the central bank does not make its interest rate decisions based on uncertain policy, Fed officials could factor Trump’s plans into their individual forecasts, the economists said.

“We just don’t know much at all about actual policy, so it’s very premature to draw a conclusion,” Powell said at a news conference following the Fed’s two-day meeting.

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Powell acknowledged that some policymakers are incorporating Trump’s policies into their estimates of inflation and interest rate cuts.

“Some people took a very preliminary step at this meeting and began to incorporate … highly conditional estimates of the economic impact of policies into their forecasts and said so at the meeting,” Powell said. “Some people said they didn’t do it. And some people didn’t say whether they did it or not. So we have people taking a number of different approaches to this. But some cited political uncertainty as one of the reasons for this. They attribute more uncertainty to inflation.

But Powell added that he believes the main reason officials expect higher inflation and fewer rate cuts next year is that progress in reducing price increases has stalled recently.

Overall, Powell said, the Fed has made “great progress” since 2022 in reducing the inflation rate from 5.6% to 2.8%. In his opinion, this supports Wednesday’s interest rate cut. But he recently added: “Inflation is moving sideways.” The path to the Fed’s 2% inflation target has “kind of stalled as we approach the end of the year.” And this, he said, is the basis for a more cautious approach to rate cuts next year.

Beth Hammack, head of the Federal Reserve Bank of Cleveland, disagreed with Wednesday’s decision, preferring to leave interest rates unchanged.

What is the Fed interest rate now?

The Fed’s move represents the third straight rate cut and brings its key short-term interest rate to a range of 4.25% to 4.5%. The move is expected to have an impact on the financial system, reducing borrowing costs for credit cards, some mortgages, and auto and other loans.

Powell said that these interest rates are “influenced to some degree by Fed policy, but also by many other things.”

“Longer-term interest rates have actually gone up quite a bit since September,” Powell said, adding, “Those are the things that affect mortgage rates more than short-term rates, for example.”

The interest rate cut will also lead to a fall in banks’ savings rates, which are finally generating good returns.

Will the Fed cut interest rates in 2025?

Fed officials now expect to cut the federal funds rate by just half a percentage point next year, to a range of 3.75% to 4%, according to their median estimate, which is half the cut they had forecast in September. And they forecast two more cuts in 2026, bringing the rate to about 3.4%, half a point higher than previously forecast.

The Fed also raised its estimate of the normal or “neutral” interest rate, which neither stimulates nor slows the economy, from 2.9% to 3%, suggesting that officials may not need to cut the key interest rate as much to reach neutral become.

The Fed is cutting interest rates to make credit cheaper and stimulate a struggling economy. It raises interest rates to curb inflation by increasing borrowing costs and cooling the economy.

In 2022 and 2023, the central bank increased the key interest rate from near zero to 23 years from 5.25% to 5.5% in response to a pandemic-related price increase.

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High prices vs. high inflation

Despite the cooling of inflation, high prices remain top of mind for most Americans. Powell spoke during Wednesday’s press conference about the Fed’s role in bringing down inflation and the “tremendous pain” brought by a previous burst of inflation.

“Now inflation itself has fallen significantly, but people are still feeling high prices,” he said. “That’s really what people feel. The best thing we can do for them – and that’s what we’re working for – is to get inflation back down to its target and keep it there, so that people deserve big, real wage increases, so that their wages go up, their salaries go up Faster than inflation year after year.

“This is what will restore people’s good feeling about the economy. That’s what’s needed and that’s what we’re striving for.”

What is the inflation rate currently?

The Fed’s preferred measure of headline inflation has fallen to 2.3% from 7% in mid-2022 – still above its 2% target – prompting officials to raise interest rates by an outsized half-point in September and by one early last month to lower it another quarter point.

Recently, however, the Fed has struggled to balance the conflicting forces.

An annual core inflation measure that excludes volatile food and energy goods – which the Fed watches more closely because their price changes are more permanent – rose slightly, from 2.7% in July to 2.8% in October. And another measure of inflation, the consumer price index, rose sharply in November for the fourth straight month.

How is the US economy doing right now?

The economy, meanwhile, grew at a healthy annual rate of 2.8% in the third quarter and is expected to grow 3.1% in the current quarter, according to the Federal Reserve Bank of Atlanta’s forecast. A retail sales report this week underscored that consumer spending is still resilient despite the strain on lower-income households.

And job growth rebounded from the hurricanes and worker strikes that depressed payrolls in the early fall, with 227,000 wage gains in November.

At the same time, Fed officials said the key interest rate was still too high given the sharp decline in inflation and they wanted to move it closer to neutral so it doesn’t unduly weaken the economy.

Despite the recent spike in price increases, the items that were driving up inflation – such as rent and car insurance and repairs – also appear to have stabilized, giving hope that inflation will fall again.

As a result, the Fed appears to be taking a middle course: cut the key interest rate now to bring it closer to neutral sooner, but then proceed cautiously next year and see if inflation still falls, what the neutral rate is really is What impact does Trump’s policies have?

The tariffs are likely to be passed on to consumers through higher prices. The deportation of millions of migrants without permanent residency status could slow labor force growth and drive up wages and inflation. And tax cuts could boost consumption and the economy and further fuel inflation.

What is the expected inflation rate in 2025?

Fed officials estimated Wednesday that their preferred measure of annual inflation, the personal consumption expenditures index, will rise from 2.3% to 2.4% by the end of the year, above the 2.3% they had predicted their mean estimate in September. It is forecast to rise to 2.5% by the end of 2025, well above the previous estimate of 2.1%.

Core PCE inflation is expected to remain at 2.8% this year, above the previous estimate of 2.6%. It is expected to fall to 2.5% by the end of next year, down from the previous forecast of 2.2%.

Will the job market improve in 2025?

The unemployment rate is expected to remain stable at 4.2% through the end of 2024, below the September forecast of 4.4%, the Fed’s median estimate shows. The rate is expected to be 4.3% at the end of 2025, slightly lower than the previous forecast of 4.4%.

What will the economy be like in 2025?

The Fed said it expects the economy to grow 2.5% this year, well above its previous estimate of 2%. Additionally, growth of 2.1% is forecast for 2025, compared to 2% previously.

Consumer spending, which accounts for 70% of economic activity, proved resilient despite high interest rates and inflation. However, low- and middle-income households are struggling with record credit card debt and high delinquency rates.

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The Fed is cutting interest rates by a quarter point and forecasts only two cuts in 2025

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