The Federal Reserve cut interest rates on Wednesday, but policymakers signaled caution about further rate cuts next year given stubborn inflation.

The central bank cut its key interest rate by a quarter of a percentage point to a range of 4.25% to 4.5%. Interest rates have fallen by a full percentage point since September, making it cheaper to take out a car loan, finance a business or keep a balance on your credit card.

On average, members of the Fed’s rate-setting committee expect borrowing costs to fall another half a percentage point in 2025. That’s down from three months ago, when they forecast interest rate cuts of a full percentage point next year.

Cleveland Federal Reserve Bank President Beth Hammack objected to Wednesday’s rate cut, saying she would have preferred to leave rates unchanged.

While inflation has fallen sharply since hitting a four-decade high in 2022, progress in prices has slowed in recent months. The annual inflation rate was 2.7% in November, slightly higher than the previous month.

“Like an MMA fighter”

Fed officials say they are committed to further reducing inflation but acknowledged it has been a long and arduous battle. Members of the interest rate committee now expect inflation to fall to the Fed’s 2 percent target by 2027.

“I feel like an MMA fighter, keeping a stranglehold on inflation, waiting for it to die down, but it keeps slipping away at the last minute,” Fed Governor Chris Waller said in a speech this month. “But I assure you that submission is inevitable. Inflation doesn’t get out of the octagon.”

The Labor Department’s latest inflation report showed some long-awaited progress in housing costs. November’s rent increases were the lowest in almost three and a half years. But the prices for new and used cars continued to rise. And food prices posted their sharpest rise in 22 months.

High food prices are a persistent criticism and likely contributed to Donald Trump’s victory in the November election.

“I won on the border, and I won on food,” the president-elect told NBC Meet the press earlier this month. “If you buy apples, if you buy bacon, if you buy eggs, within a short period of time they were twice or three times more expensive. And on that basis I won an election.”

Food prices have risen 22% since President Biden took office, while average wages have risen 19% during that time.

Inflation could rise under Trump 2.0

Economists warn that some of Trump’s policy proposals – including tariffs and mass deportations – could lead to higher inflation. Fed Chairman Jerome Powell said it was too early to speculate. However, this is another reason for the central bank to be cautious about further rate cuts.

Fed officials also believe they can afford to take their time cutting interest rates as the labor market remains relatively stable. The unemployment rate rose slightly in November, but at 4.2% it is still at a very low level by historical standards.

“The economy is not sending any signals that we need to rush to cut rates,” Powell said in a speech last month. “The strength we are currently seeing in the economy gives us the opportunity to approach our decisions carefully.”

While the overall economy performed well, high interest rates weighed on certain sectors – particularly manufacturing and real estate. According to the Institute for Supply Management, U.S. factories have been in crisis for much of the past two years. Existing home sales are expected to be the weakest year in nearly three decades, according to Fannie Mae.