Washington: The US Federal Reserve cut interest rates by a quarter point on Wednesday and signaled a slower pace of cuts, amid growing uncertainty over inflation and President-elect Donald Trump’s economic plans.
Policymakers voted 11-to-1 to cut the central bank’s key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement.
It is the last planned interest rate decision before outgoing Democratic President Joe Biden makes way for Republican Donald Trump, whose economic proposals include tariff hikes and the mass deportation of millions of undocumented workers.
These policies, combined with recent increases in inflation data, led some analysts to scale back the number of rate cuts expected in 2025 ahead of Wednesday’s meeting, predicting that interest rates will need to remain high for longer.
While inflation has “declined significantly,” levels remain “somewhat high” relative to the Fed’s long-term goal of two percent, Chairman Jerome Powell said Wednesday.
He added that the Fed was now “significantly close” to the end of its current easing cycle.
Only two cuts
In updated economic forecasts published alongside the rate decision, members of the Fed’s rate-setting committee penciled in two quarter-point rate cuts in 2025, down from an earlier forecast of four, and raised their headline inflation outlook for next year from 2.1. percent to 2.5 percent.
The Fed has made progress in combating inflation through interest rate hikes over the past two years, and has recently begun scaling back rates to boost demand in the economy and support the labor market.
But over the past two months, the Fed’s favored inflation measure has ticked higher, drifting away from the bank’s target, and raising concerns that the U.S. central bank’s war is far from over.
“I doubt another cut is necessary,” Nathan Sheets, Citigroup’s global chief economist, told AFP ahead of the meeting.
High inflation in 2025
The 19-member committee’s median forecast for headline inflation rose sharply to 2.5 percent in 2025, up from 2.1 percent in September.
This year’s growth outlook has also risen, climbing to 2.5 percent before cooling to 2.1 percent in 2025, down slightly from September.
The unemployment rate is expected to be slightly lower than previously expected at 4.2 percent this year, and then tick slightly to 4.3 percent in 2025 and 2026.
But some analysts think policymakers’ projections for unemployment are overly optimistic.
“Rate cuts will come faster than the Fed expected, with unemployment at the top of new forecasts,” Samuel Toombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note to clients published after the decision.
Futures traders see about a 90 percent chance the Fed will pause a rate cut next month, and a 60 percent chance it won’t make more than one cut in all of 2025, according to CME Group data.