Fed Cuts Interest Rates A Third Time, Points To Inflation As Challenge For 2025

(MENAFN- The Peninsula) Washington Post

The federal Reserve lowered interest rates by an additional quarter percentage point and signaled a slower pace of cuts next year, as inflation proves to be a bigger challenge than it estimated just a few months ago.

The Fed penciled in just two rate cuts for 2025, down from four forecasted in September, emphasizing that future cuts would depend on progress toward curbing inflation and continued strength in the labor market.

"Today was a closer call, but we decided it was the right call because we thought it was the best decision to foster achievement of both of our goals,” Fed Chair Jerome H. Powell said at a news conference. "... Inflation - we see that story as still broadly on track.”

Inflation has weighed heavily on Americans, especially those with middle and lower incomes, and it drove voters to the polls in November to elect Donald Trump, exit polling showed. Despite the recent rate cuts, mortgage rates have increased and housing inflation remains a challenge.

Wednesday's cut, which was widely expected and reduces rates to the lowest point in two years, comes about a month before Trump's return to the White House. His promises around immigration, regulation, tax and spending policies could shift expectations for the economy and ultimately shift the central bank's future stance on rates.

Interest rate cuts trickle through the financial sector to make an array of consumer and business loans cheaper, influencing mortgage rates and other types of loans.

"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks,” the Fed said in a statement.

The Federal Reserve also downgraded its view of how inflation will progress next year. Now officials expect "core” inflation to be around a 2.5 percent increase at the end of 2025, which is up from an earlier estimate of 2.2 percent. Core inflation excludes volatile food and energy categories, which can surge and fall depending on outside factors.

After a jumbo cut in September and a smaller one in November, officials have now lowered rates by a full percentage point. (Mortgage rates, which generally track 10-year borrowing costs for the Treasury Department, have increased on expectations of a stronger economy going forward.)

Wednesday's announcement comes at the end of the Fed's two-day policy meeting. The vote was 11-1, with a lone dissent from Cleveland Fed President Beth Hammack. She preferred to keep rates unchanged, the Fed said.

In their campaign to lower inflation, Fed policymakers appear to have succeeded in avoiding a recession once thought inevitable by economic forecasters. Now, officials are trying not to make too many cuts too quickly, which could keep inflation well above the Fed's 2 percent target, while also not cutting too slowly, which could allow the labor market to deteriorate.

The Fed is "now entering a different and more cautious phase of policy, with a more noncommittal approach to the timing and extent of additional cuts,” Krishna Guha of Evercore ISI said ahead of Wednesday's cut.

Going into this week's Fed meeting, some officials suggested they would need to see evidence that inflation is cooling or that the labor market is softening before continuing to reduce borrowing costs.

"We are at or near the point where it makes sense to slow the pace of rate reductions,” Hammack said in a December 6 speech.

Though inflation and growth figures were a bit hotter than the Fed predicted earlier in the year, officials signaled comfort with easing rates for a third and final time in 2024 for a couple of key reasons.

First, most officials say the Fed benchmark rate - which was lowered to between 4.25 and 4.50 percent - continues to restrict economic growth, which keeps inflation in check. That means they can afford to cut now while maintaining rates that dampen demand.

Second, there were some positive developments in last week's report on consumer prices from the Bureau of Labor Statistics. While the report showed that inflation grew by 2.7 percent in November from the prior year, one of the largest components of the report, housing, increased at a slower pace than earlier in the year. That's important because housing costs had previously helped to buoy inflation.

Other drivers of inflation, such as auto insurance premiums and airline fares, also grew at a slower pace than in previous months.
Powell said this month that the central bank could afford to move deliberatively going forward.

"Growth is definitely stronger than we thought, and inflation is coming a little higher,” Powell said at a Dec. 4 conference hosted by the New York Times. "The good news is that we can afford to be a little more cautious.”

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