The Fed lowered its target rate by 25 basis points, bringing the federal funds rate range from 4.25% to 4.5%. The move marks the Fed’s third consecutive rate cut since September, totaling 100 basis points over the period.

Fed Chairman Jerome Powell described the decision as a “close call,” but said it was ultimately the “right decision” in balancing the dual imperatives of maximum employment and price stability. “We decided this was the best decision to help us achieve both of our goals,” Powell said at a news conference after the announcement.

Approach carefully from here.

Chairman Powell signaled a more cautious approach to cutting interest rates in 2025, suggesting the hurdles for further rate cuts are now higher than they are now. “Today’s action lowers the policy rate by 1 percentage point from its peak and significantly eases the policy stance,” Chairman Powell said. “Therefore, we may be more cautious when considering further adjustments to policy rates.”

Chairman Powell said future interest rate movements will be data-dependent and will be determined based on further information about inflation and the economy. Using an analogy, he said, “It’s like driving a car on a foggy night or walking into a dark room full of furniture, just slow down.”

The decision was not unanimous. Cleveland Fed President Beth Hammack voted against cutting rates and supported keeping them on hold. His opposition will be the second consecutive Federal Open Market Committee (FOMC) meeting with a negative vote, following a similar stance by Fed Director Michelle Bowman at its September meeting.

A key element of Wednesday’s announcement was a summary of the Fed’s latest economic outlook. New forecasts show policymakers expect only two rate cuts in 2025, compared to September’s forecast, which expected four rate cuts.

The new forecast puts the federal funds rate at 3.9% by the end of 2025, up from the 3.4% level projected in September. This suggests that Fed officials expect the financial squeeze to last longer than originally expected.

David Mericle, chief U.S. economist at Goldman Sachs, said: “The FOMC is concerned that implementing too many cuts could look inappropriate in hindsight if tariffs significantly boost inflation.” “We are concerned about certain things and therefore may prefer to wait until there is clarity on what will happen.”

Resilient labor market, inflationary pressures

The broader economic context for this decision includes signs of continued resilience in the U.S. labor market. Employers added an estimated 227,000 jobs in November, showing steady demand for workers. Meanwhile, inflation remains above the Fed’s 2% target. The Fed’s preferred measure of inflation, the Core Personal Consumption Expenditures (PCE) index, was 2.3% in October, close to its target. Inflation rose to 2.7% in November from 2.6% in October, according to Consumer Price Index (CPI) data.

Fed officials said inflation remains “moderately high” and expect it to remain above 2% through 2026, a change from their previous forecast for 2025.

reaction

The US stock market reacted negatively. The perception that monetary policy tightening will be prolonged has dampened investor sentiment.

For consumers, a reduction in the federal funds rate could result in slightly lower interest rates on credit cards, auto loans, and certain types of variable-rate borrowing. However, mortgage rates are more closely tied to Treasury yields and do not follow the Fed’s rate cuts. Mortgage rates are actually rising, with the average rate on a 30-year fixed mortgage now at 6.75%, up from 6.67% the previous week.

What’s next?

While Powell remained optimistic about the economic trajectory, he stressed the importance of patience as policymakers assess the effectiveness of recent interest rate cuts.

It is widely expected that the next FOMC meeting in January will leave the policy rate unchanged and suspend it.