Federal Reserve Cuts Interest Rate by a Quarter-Point, Signals Fewer Interest Rate Cuts Next Year

The Federal Reserve followed through on the third straight interest rate cut, lowering the benchmark rate by 25 basis points to a range of 4.25 to 4.5 percent at the December policy meeting.

It also said it expects fewer interest rate cuts in 2025 as inflation pressures weigh on monetary policy.

Investors had overwhelmingly expected the U.S. central bank to cut interest rates.

The post-meeting statement was little changed, though the language was altered to “extent and timing” regarding interest rate decisions.

Financial markets were more focused on updates to the Summary of Economic Projections, a quarterly survey of policy and economic activity expectations in the coming year.

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Policymakers expect two half-point rate cuts in 2025, signaling a more conservative approach to loosening monetary policy. They also forecast another 50 basis points worth of rate cuts in 2026.

The median policy rate is projected to be 3.125 percent in the next three years.

Cleveland Fed President Beth Hammack was the lone dissenting vote, preferring no rate cut this month.

Data suggest that the economy could be enduring sticky inflation heading into 2025. Indeed, inflation has steadily risen since the Fed kicked off its easing cycle in September with a jumbo half-point rate cut.

Prior to the Fed meeting, economic observers cautioned that the central bank could slow the pace of rate cuts in 2025 amid stubborn inflation pressures.

“The Fed will become increasingly reluctant to cut in the future which is why we expect the pace of rate cuts to slow in 2025,” said Bryce Doty, the senior vice president and senior portfolio manager at Sit Investment Associates, in a note emailed to The Epoch Times.

Research Shows How Much Fed Lowered Inflation

The Fed has been pleased with the progress on inflation since officials began tightening monetary policy in March 2022.

While recent figures signal sticky inflation ahead, it has eased significantly since reaching the 9.1 percent peak in June 2022.

But how much did the central bank contribute to this disinflation trend?

Economists Thomas Ferguson and Servaas Storm, relying on models produced by former Fed Chair Ben Bernanke and former International Monetary Fund chief economist, determined that the central bank’s cumulative impact of monetary tightening helped lower the U.S. inflation rate.

“This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S,” they wrote in the paper published in the Institute for New Economic Thinking.

“We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline.”

Other factors played a role in fueling the decline in inflation’s growth rate, the economists noted. The loosening of global supply-side constraints and U.S. dollar appreciation, which lowered import costs and weakened export demand for U.S. goods, helped the situation.

Research showed that wages also helped the situation.

“A major reason why U.S. inflation fell is that the real wages of U.S. workers took a hit,” the paper stated. “That is, the inflationary process slowed down and the inflation rate declined, because America’s workers were, in general, unable to raise their nominal wages in line with the rise in the cost of living.”

However, while economists have lauded the Federal Reserve for its work tackling inflation, many Americans think the central bank mismanaged the issue.