The Federal Reserve has lowered interest rates for the final time this year by 25 basis points, bringing the fed funds rate to a range of 4.25%-4.5%. This marks a significant shift in the Fed’s policy trajectory, as it slows the pace of rate cuts and provides updated economic projections for 2025 and beyond.
Key Takeaways from the Fed’s December Meeting:
Interest Rate Cuts:
Following this week’s decision, the Fed’s “dot plot” suggests two more rate cuts in 2025. However, the projected 2025 rate of 3.9% is higher than the 3.4% forecasted in September. In total, the central bank has reduced rates by 100 basis points in 2024, following a strategy of gradual easing.
Economic Growth:
The Fed has revised its economic growth forecast upward for 2024, projecting a 2.5% increase in GDP, up from the previous 2.0% forecast. For 2025, GDP growth is expected to moderate to 2.1%, with growth continuing to slow in the following years.
Inflation Outlook:
While inflation has moderated this year, it remains above the Fed’s 2% target. The Fed now expects core inflation to peak at 2.5% in 2025, slightly higher than its September projection of 2.2%. The inflation outlook remains a key concern, particularly as recent “core” price readings have exceeded expectations.
Labor Market:
Unemployment is expected to rise slightly to 4.3% in 2025, which is lower than the 4.4% forecasted in September. The Fed is closely monitoring the job market, where the unemployment rate ticked up to 4.2% in November. Economists describe the current job market as “low-hire, low-fire,” with some debate on whether the labor market is cooling or weakening more quickly.
Future Projections:
By 2026, the Fed anticipates the fed funds rate will fall further to 3.4%, a modest reduction from the September projection of 2.9%. The Fed’s cautious approach reflects its balancing act between supporting economic growth and achieving its dual mandate of price stability and full employment.
Political Uncertainty:
The potential return of Donald Trump to the presidency has added a layer of complexity to the economic outlook. Some economists warn that his proposed policies—such as higher tariffs, tax cuts, and curbs on immigration—could trigger inflationary pressures, complicating the Fed’s future decisions on interest rates.
The Road Ahead
As the Fed pivots to a more cautious stance in its rate-cutting cycle, markets will now focus on the upcoming December Federal Reserve meeting and how policymakers plan to navigate a challenging landscape of moderating inflation, labor market dynamics, and economic growth. The latest economic projections suggest the Fed is positioning itself to achieve a “soft landing,” where inflation stabilizes while employment remains robust.
The decision to slow down the pace of rate cuts reflects the Fed’s ongoing efforts to balance these competing priorities, as it aims to manage the risks of inflation while supporting a resilient economy.
With the projected slowdown in GDP growth and the persistently high inflation outlook, 2025 could see continued challenges for the Fed, particularly as it navigates the potential political and policy shifts that may arise in the coming year.
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