Federal Reserve officials made their third and final rate cut of 2024 at their meeting on Wednesday. They also forecast two fewer rate reductions in 2025 than they had previously expected, as inflation lingers and the economy holds up.
The Fed has come a long way from just a few years ago: In 2022, inflation was ?g=1Ciyn” rel=”noopener noreferrer” target=”_blank”>more than twice its current rate and many economists thought that the central bank’s decisions might cause economic pain — and even a recession — as it rapidly lifted interest rates to slow demand and wrestle price increases back under control.
That didn’t happen. The job market slowed without falling apart, and inflation cooled so substantially that the Fed was able to begin cutting interest rates in September.
But the Fed is now entering a new phase in its journey toward an economic soft landing.
Officials thought that it was clear that rates needed to come down notably from their 5.3 percent peak, and they have steadily lowered them to about 4.4 percent by making three back-to-back reductions. Policymakers do not want to cut rates so much that they reignite the economy, though — and they have now arrived at a point where it is uncertain how much further rates should fall.
“Our policy stance is now significantly less restrictive,” Jerome H. Powell, the Fed chair, said during a news conference on Wednesday. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
“From here, it’s a new phase,” Mr. Powell later added.
The Fed’s forecasts make clear that central bankers are poised to slow rate cuts notably over the next several years as stubborn inflation lingers.
Fed officials predicted that they will cut rates to 3.9 percent in 2025 in their fresh economic estimates — suggesting that they will make just two rate cuts next year. They had forecast four when they last released economic projections back in September.
They then expect to make two rate cuts in 2026, and one in 2027.
The exact timing of the Fed’s future rate reductions is uncertain, and Mr. Powell made it clear that any moves would be based on incoming data. He suggested that the Fed might hold off on rate cuts if inflation were to get stuck at an unexpectedly higher level.
“For additional cuts, we’re going to be looking for further progress on inflation,” Mr. Powell said on Wednesday.
He also said that further softening in the labor market was “not something we need to see.” But he stopped short of suggesting that the Fed would cut interest rates purely to prevent job conditions from cooling, as it has in recent months.
Fed policymakers are balancing two big risks. They do not want to keep rates so high for so long that they tank the economy. But they also want to make sure to fully stamp out rapid inflation — and right now, price increases are making officials wary.
On Wednesday, policymakers predicted that inflation would end 2025 at 2.5 percent, up from the previous 2.1 percent estimate and well above the central bank’s 2 percent inflation target.
Those revisions come after a surprising period in the economy.
Earlier this year, the unemployment rate was climbing, hiring was slowing, and inflation had been falling steadily. But since September, the job market has shown signs of stabilizing, consumer spending has remained solid and inflation has been more stubborn than many economists had expected.
Mr. Powell said that the recent lack of progress on inflation “might be the single biggest factor” driving the Fed’s forecast for price increases in 2025 higher.
But Fed officials are also operating in an environment of uncertainty: President-elect Donald J. Trump has been promising to impose tariffs on American trading partners, and those could push prices up and feed into inflation if they become reality.
Some Fed policymakers did count fiscal policy into their economic projections, which could have driven some of the increase in their inflation forecasts. But exactly how much the policies would affect inflation is uncertain.
“I wouldn’t say that we know whether the last episode is or is not a good model,” Mr. Powell said on Wednesday, referring to the tariffs put in place during Mr. Trump’s first term. He explained that officials are going to “take our time, not rush” and wait to see what the policies actually look like before reacting.
The economic combination facing the Fed in 2025 — an expectation for resilient growth and a hairier inflation outlook — explains the central bank’s shift toward a wait-and-see approach.
“If the economy does evolve about as anticipated, we’re at a point at which it would be appropriate to slow the pace of rate cuts,” Mr. Powell said.
In fact, some officials thought that the Fed should hit pause on interest rates this month. Beth Hammack, the president of the Federal Reserve Bank of Cleveland, voted against the rate cut, preferring to leave borrowing costs unchanged.
And while only five of the Fed’s 12 regional presidents vote on policy at any given time, three of the non-voting officials appear to have favored leaving interest rates unchanged at this meeting, based on their economic projections.
“The job’s not done,” Mr. Powell said Wednesday.
The Fed chair still had an overall optimistic message for the American public: “The U.S. economy is just performing very, very well — substantially better than our global peer group,” Mr. Powell said. “The outlook is pretty bright for our economy. We have to stay on task, though.”
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