Federal Reserve cuts interest rates by quarter-point in December

The Federal Reserve on Wednesday announced its third straight interest rate cut, lowering the benchmark rate by 25 basis points amid economic data showing that inflation remains above the central bank’s target rate.

With the 25-basis-point cut, the benchmark federal funds rate will sit at a range of 4.25% to 4.5%. The Fed’s move follows a 25-basis-point cut in November and a larger-than-normal cut of 50 basis points at its September meeting, which was the first reduction in rates since March 2020 and brought them down from a range of 5.25% to 5.5% – the highest level since 2001.

The Federal Open Market Committee (FOMC), the group within the Fed responsible for setting monetary policy, said in a statement that “labor market conditions have generally eased, and the unemployment rate has moved up but remains low” and while inflation has made progress towards the 2% objective, it “remains somewhat elevated.”

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate,” the FOMC added.

One member of the FOMC, Cleveland Fed President Beth Hammack, dissented from the decision to cut rates and preferred to hold the benchmark rate at a range of 4.5% to 4.75%.

The FOMC also released a summary of economic projections, which reflected two rate cuts in 2025, two cuts in 2026 and one cut in 2027. It had previously projected four cuts in 2025 in its most recent projection from September.

The summary shows the median of the federal funds rate at 4.4% at the end of 2024, before declining to 3.9% in 2025, 3.4% in 2026 and 3.1% in 2027. Those forward-looking projections are higher than the Fed’s September projections, with the 2025 and 2026 medians each a half-point higher and the 2027 figure 0.2 percentage points higher.

It also projects that the personal consumption expenditures (PCE) index, which is the Fed’s favored inflation gauge, will finish this year at 2.4% and will be 2.5% in 2025 – up from 2.1% in the previous projection released in September. PCE would then decline to 2.1% in 2026 before reaching 2% in 2027 and over the longer run.

“Today was a closer call, but we decided that it was the right call because we thought it was the best decision to foster achievement of both of our goals, maximum employment and price stability,” Fed Chair Jerome Powell said at a press conference.

“We see the risks two-sided – moving too slowly and needlessly undermine economic activity and the labor market, or move too quickly and needlessly undermine our progress on inflation. So we’re trying to steer between those two risks, so we decided to move ahead with a further cut,” he explained. 

Powell said that downside risks to the labor market have diminished, but noted that the labor market is looser than it was before the pandemic and is continuing to cool, which isn’t needed to get inflation to the 2% target. He also noted that the pace of the decline in inflation has flattened over the last year in part because housing services inflation is falling at a slower pace than hoped, with some “bumpiness” in prices for goods.

“We coupled this decision today with the extent and timing language in the post-meeting statement that signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments,” Powell said.

“We’re significantly closer to neutral at 4.3% and change, we believe policy is still meaningfully restrictive, but as for additional cuts, we’re going to be looking for further progress on inflation as well as continued strength in the labor market,” he explained. “And as long as the economy and labor market are solid, we can be cautious as we consider further cuts and all of that is reflected… in the December SEP which showed a median forecast of about two cuts next year compared to four in September.” 

This is a developing story. Please check back for updates.