The Federal Reserve announced its third straight rate cut in 2024 on Wednesday, cutting its key interest rate by 0.25 percentage points amid cooling inflation. But to the detriment of borrowers, the central bank also predicted that it would ease interest rates less next year than previously expected.

The Fed cut the federal funds rate – interest rate banks charge each other for short-term loans – to a range of 4.25% to 4.5%, from a previous range of 4.5% to 4.75%. The decision comes after policymakers dramatically cut interest rates 0.5 percentage points in Septemberfollowed by a Decline of 0.25 percentage points in November.

The Fed has now cut interest rates by 1 percentage point since September, offering Americans relief on credit card balances other debts.

Fewer rate cuts in 2025

At the same time, the Fed expects only two rate cuts in 2025, compared to four rate cuts it had predicted in September, when it issued its last economic forecasts. The central bank now forecasts that the federal funds rate could average at 3.9% by the end of 2025, up from the previous forecast of 3.4%.

The Fed also forecasts inflation could be higher at 2.5% in 2025 than it expected in September, when it predicted price increases would slow to 2.1% next year.

Wall Street slumped in Wednesday afternoon trading, with the S&P 500 closing down 178 points, or 2.9%, and the Dow Jones Industrial Average plunging 1,123 points, or 2.2%. The tech-heavy Nasdaq Composite Index fell even more on the day, sliding 716 points, or 3.6%.

“The market is forward-looking and ignoring the good news of today’s rate cut and instead focusing on the small rate cuts next year,” noted Chris Zaccarelli, chief investment officer of Northlight Asset Management, in an email. “(T)he market was disappointed with the likely future direction of interest rates.”

In a news conference on Wednesday, Federal Reserve Chairman Jerome Powell acknowledged that progress in bringing inflation down to the central bank’s 2% annual target was slower than expected as consumer prices rose in November 2.7% on an annual basisfueled by increased housing and food costs.

“I would say today was a closer call, but we decided it was the right decision” to cut rates, Powell said of Wednesday’s rate cut. “The slower pace of cuts for next year reflects the higher inflation readings we have had this year.”

The Fed could choose to forego a rate cut in January and resume easing at its March meeting, said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquid solutions at Goldman Sachs Asset Management, in an email.

“While the Fed chose to round out the year with a third straight rate cut, its New Year’s resolution appears to suggest a slower pace of easing,” Watson said.

New phase of monetary policy

The expected rate cut was the “least important component” of today’s Fed meeting, noted Jack McIntyre, portfolio manager at Brandywine Global, in an email. Instead, Wall Street focused on the Fed’s forecasts for 2025 and beyond, with the central bank’s new forecasts signaling that the Fed has entered “a new phase of monetary policy, the pause phase,” McIntyre added.

Wednesday’s move marks the Fed’s final interest rate decision before President-elect Donald Trump’s inauguration on January 20. While price increases have moderated since peaking in June 2022, opening the door for Fed rate cuts this year, inflation has remained stubborn and well above the Fed’s annual target of 2%.

Given that inflation has been stubborn this year, many analysts have predicted that the Fed will likely cut interest rates less in 2025 amid concerns that the economy could overheat.

Still, the Fed has so far defied forecasters’ warnings that its rate hikes could trigger a recession.

The Fed’s first interest rate meeting of 2025 is scheduled for January 28-29, or after Trump’s inauguration. About eight in 10 economists expect the Fed to keep interest rates stable this meeting, according to financial data firm FactSet.

Powell’s optimistic economic outlook

While Powell said the slow progress in fighting inflation was “somewhat frustrating,” he also expressed optimism about the U.S. economy, emphasizing that the country’s growth has far outpaced that of other developed economies.

“It’s pretty clear we’ve avoided a recession – growth this year has been solid,” Powell said. “Again, the U.S. economy has been nothing short of remarkable,” while other countries are struggling with slow growth and “struggling with inflation.”

He added: “I expect another good year next year.”

As for Trump’s stated plans to impose broad tariffs that many economists predict could prove inflationary if passed, Powell said the Fed is taking a wait-and-see approach. The Fed is assessing the possible impact of the tariffs, but it will take “quite a while” for the second Trump administration to enact measures that could be considered by the central bank, Powell added.

“We just don’t know much about the actual policy at all – we don’t know how much tariffs are being imposed by which countries,” he noted. “We don’t know if there will be retaliatory tariffs.”