The U.S. Federal Reserve implemented an interest rate cut on Wednesday, signaling a deceleration in the pace of future reductions. This decision stems from a relatively stable unemployment rate and minimal recent improvement in inflation. The Federal Open Market Committee (FOMC) reduced the benchmark policy rate to a range of 4.25%-4.50%. Notably, Cleveland Fed President Beth Hammack dissented, favoring maintaining the existing policy rate.
Table Content:
Projections and Rationale
Current projections by U.S. central bankers indicate only two quarter-percentage-point rate reductions by the end of 2025. This represents a decrease of half a percentage point in policy easing compared to September’s anticipations.
In a post-announcement press conference, Fed Chair Jerome Powell stated that assessing the economic impact of President-elect Donald Trump’s proposed policies and their implications for Fed policies remains premature. Policymakers emphasize the need for more substantial progress in curbing inflation before determining the trajectory of future rate cuts.
Market Response to the Fed Decision
The Fed’s announcement triggered immediate reactions across various financial markets:
- Stocks: The S&P 500 experienced a 1.5% decline following the news.
- Bonds: Yields on benchmark U.S. 10-year notes increased to 4.49%, while 2-year note yields rose to 4.35%.
- Forex: The dollar index strengthened by 1.8%, and the euro extended its loss to -1.19%.
Expert Analysis and Commentary
Experts offered insights into the Fed’s decision and its potential implications:
Michele Raneri, Head of U.S. Research and Consulting, TransUnion: The reduction signals the Fed’s confidence in the impact of gradual rate cuts and anticipates a continued favorable impact on the broader economy. Consumers should monitor interest rates on credit cards, mortgages, and auto loans and maintain a strong credit profile to capitalize on potential lower rates.
Seema Shah, Chief Global Strategist, Principal Asset Management: The rate cut was expected, but revisions to projections suggest a reluctant reduction, providing comfort to markets while preparing for a more hawkish policy approach in 2025. Further monetary easing might be necessary, but caution and patience are paramount.
Jack McIntyre, Portfolio Manager, Brandywine Global: The rate cut itself was less significant than the “hawkish cut” signaled by forward guidance. Stronger expected growth and higher anticipated inflation led to fewer expected rate cuts in 2025. This marks a new “pause phase” in monetary policy, potentially increasing market volatility in 2025.
Ellen Hazen, Chief Market Strategist, F.L.Putnam Investment Management: The “hawkish cut” reflects the Fed’s revised forecasts for higher inflation and lower unemployment. The stronger-than-expected economy contributes to the potential for a pause in rate cuts.
Gennadiy Goldberg, Head of U.S. Rates Strategy, TD Securities: The Fed signals less dovishness, leaning towards fewer cuts in the coming year. Markets may price in even fewer or no cuts if data remains strong. The Fed’s reluctance to continue cutting without sufficient inflation reduction suggests a “higher for longer” rate environment.
Peter Cardillo, Chief Market Economist, Spartan Capital Securities: The unsurprising 25 basis point cut, along with the indication of only two rate cuts next year, signals a likely pause in January, potentially extending into the first quarter. Reduced pace of cuts, a looming pause, and inflation uncertainty contribute to market downturn.
Brian Jacobsen, Chief Economist, Annex Wealth Management: Concerns about tariffs might be influencing the Fed’s projections, leading to fewer anticipated rate cuts in 2025, slightly higher inflation, and a modest rise in unemployment. The strong economy allows for fewer cuts, but the current environment, with inflation above target, differs significantly from 2019, requiring a more cautious approach.
Conclusion: A Shift in Monetary Policy
The Federal Reserve’s decision to cut interest rates while simultaneously signaling a slower pace of future reductions reflects a shift in monetary policy. This strategic adjustment is driven by a combination of factors, including a relatively stable unemployment rate, persistent inflation concerns, and revised economic projections. Market reactions and expert commentary underscore the significance of this decision and its potential implications for the economy and financial markets in the coming years. The Fed’s emphasis on data-dependency and its commitment to addressing inflation will continue to shape the course of monetary policy moving forward.
