The Federal Reserve (Fed) This Wednesday, it lowered its reference interest rate by quarter percentage point (25 basis points), up to the range of 4.25-4.5%in its third consecutive rate cut, although it accompanies the decision with a warning tone about a imminent pause in its cycle of monetary easing and smaller additional cuts for next year. The market reaction has been negative with falls on Wall Street and strength of the dollar against the euro.
He Federal Open Market Committee (FOMC, for its acronym in English) accumulates 100 basis points of rate cuts since September, placing them at its lowest level since December 2022. The decision was widely discounted by investors, but not so that the Fed is in a position to pause its movements sooner than expected.
In fact, the main question was what signals the Federal Reserve would give about its future intentionsgiven that inflation remains high and above the 2% target, unemployment remains at a minimum and economic growth remains quite solid
In your forecast diagram, Fed signals it will likely only cut rates twice more in 2025, one less than in its September projection. Furthermore, assuming that these cuts are a quarter point, the monetary authority foresees two additional cuts in 2026 and another in 2027.
For the second consecutive meeting, an FOMC member voted against the decision taken. The president of the Cleveland Federal Reserve, Beth Hammackspoke in favor of maintaining rates instead of lowering them. In November, Michelle Bowman voted against it in November, marking the first time since 2005 that a governor voted against a rate decision.
The post-meeting statement changed little, except for an adjustment in language regarding the “magnitude and timing” of future rate changes, a slight modification compared to the November meeting. “The committee considers that the risks to achieving its employment and inflation objectives are approximately balanced. The economic outlook is uncertain and the Committee is attentive to the risks to both sides of its dual mandate,” it notes in its statement.
Specifically, the Fed now expects that the Gross Domestic Product (GDP) for the entire year 2024 at 2.5%, half a percentage point more than in September. However, officials expect GDP to slow to 2.1% in 2025 and 2% in 2025, according to the economic projections chart. Other changes in that document are the improvement in the unemployment rate expected for this year to 4.2%, while both the growth of headline and core inflation rose to 2.4% and 2.8%, higher than in September and the Fed’s 2% target.
Although these conditions would be more compatible with the Fed would raise or maintain rates, Officials fear keeping rates too high and risking an unnecessary slowdown in the economy. The chairman of the Federal Reserve, Jerome Powellhas indicated that the rate cuts are an effort to recalibrate policy as it does not need to be as restrictive under current conditions.
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