Fed cuts rates 25 basis points, signals slower pace of rate cuts
Summary
On Wednesday, December 18, 2024, the Federal Open Market Committee (FOMC) voted 11 to 1 to decrease the fed funds rate to a target range of 4.25%–4.50%. This marks 100 basis points of interest rate cuts since the FOMC began adjusting the target range at the September 2024 meeting. Beth Hammack, the only dissenting vote, preferred to maintain the target range at 4.50%–4.75%. The Committee projects higher inflation over the next two years, raising its end of 2025 PCE inflation forecast to 2.5%, up from 2.1% in September. Similarly, the FOMC’s projections for rates at the end of 2025 and 2026 are 50 basis points higher than their projections in September, reflecting their expectation of higher inflation readings. Fed Chair Powell noted that today’s interest rate cut was a closer call than the previous rate cuts, signaling that the Committee feels that they are now at or near a point to pause rate cuts. To justify further rate cuts, Powell emphasized the need for clear progress against inflation.
Impact on rates
Short-term swap rates increased seven to 10 basis points following the FOMC meeting, highlighting a slowdown in the pace of interest rate cuts. In today’s updated dot plot, the FOMC is now projecting two fewer interest rate cuts in 2025 versus September’s projections. The Committee believes that the upside risk of rising inflation is higher than the risk of a rapidly softening economy, leading to support for a pause in rate cuts.
Source: Chatham Financial
Source: Chatham Financial
Source: Chatham Financial
Moving forward
Floating-rate borrowers may see more risks of rising short-term interest rates as the FOMC projects sticky inflation and the need to slow the pace of rate cuts. The Committee remains focused on achieving their dual mandate of maximum employment and reducing inflation to 2%. That said, the Committee does see the risk between inflation and maximum employment to be roughly in balance and will continue to react to data. Powell described the U.S. economy as remarkably strong, with the labor market continuing to soften in a controlled manner. Powell balanced his statement on the strength of the economy by stating that the path of inflation is uncertain, and the Committee needs to move slower, like “driving on a foggy road.” The market will be closely watching for signs of stalled progress on inflation, which could prompt the Fed to pause rate cuts longer than currently expected.
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