Federal Reserve officials made their third and final rate cut of 2024 at their meeting on Wednesday. They also forecast two fewer rate cuts in 2025 than they had previously expected, as inflation lingers and the economy remains robust.
The Fed has come a long way from just a few years ago: In 2022, inflation was 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. Policymakers are now trying to bring inflation the rest of the way down without tanking the economy in the process.
Yet the Fed is 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. But policymakers do not want to cut rates so much that they reignite the economy — and they are now approaching the point where it is uncertain how much further rates should fall.
Fed officials predicted that they will cut rates to 3.9 percent in 2025 in fresh economic estimates released Wednesday. They then saw rates coming down to 3.4 percent in 2026, and over the longer term, they thought they would level off at 3 percent — slightly higher than what they had previously expected.
“The economic outlook is uncertain,” officials reiterated in their statement.
Fed policymakers are balancing two risks. They do not want to keep rates so high for so long that they squeeze the economy and inflict serious damage. But they also want to make sure to fully stamp out rapid inflation, so they do not want to lower rates too much and too rapidly, heating up the economy.
Their economic projections suggest that they will pause rate cuts at some point next year, making just two quarter-point cuts over the course of their eight meetings. When they last released economic projections in September, they had expected to make four rate cuts next year. They expect to make two rate cuts in 2026, and one in 2027.
But even if rate reductions are poised to slow, the question is exactly when the pause will come. Investors may get a hint of that when Jerome H. Powell, the Fed chair, holds a news conference with reporters at 2:30 p.m.
The Fed’s 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. Officials lowered their expected unemployment rate for 2024 and 2025 in Wednesday’s projections, but they nudged up their inflation forecasts notably. Policymakers predicted that inflation would end 2025 at 2.5 percent, up from 2.1 percent previously and well above the central bank’s 2 percent inflation target.
That combination — of resilient growth and sticky inflation — explains the Fed’s more cautious approach.
In fact, some officials thought that the Fed should not cut 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 Fed has come a long way from just a few years ago: In 2022, inflation was 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. Policymakers are now trying to bring inflation the rest of the way down without tanking the economy in the process.
Yet the Fed is 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. But policymakers do not want to cut rates so much that they reignite the economy — and they are now approaching the point where it is uncertain how much further rates should fall.
Fed officials predicted that they will cut rates to 3.9 percent in 2025 in fresh economic estimates released Wednesday. They then saw rates coming down to 3.4 percent in 2026, and over the longer term, they thought they would level off at 3 percent — slightly higher than what they had previously expected.
“The economic outlook is uncertain,” officials reiterated in their statement.
Fed policymakers are balancing two risks. They do not want to keep rates so high for so long that they squeeze the economy and inflict serious damage. But they also want to make sure to fully stamp out rapid inflation, so they do not want to lower rates too much and too rapidly, heating up the economy.
Their economic projections suggest that they will pause rate cuts at some point next year, making just two quarter-point cuts over the course of their eight meetings. When they last released economic projections in September, they had expected to make four rate cuts next year. They expect to make two rate cuts in 2026, and one in 2027.
But even if rate reductions are poised to slow, the question is exactly when the pause will come. Investors may get a hint of that when Jerome H. Powell, the Fed chair, holds a news conference with reporters at 2:30 p.m.
The Fed’s 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. Officials lowered their expected unemployment rate for 2024 and 2025 in Wednesday’s projections, but they nudged up their inflation forecasts notably. Policymakers predicted that inflation would end 2025 at 2.5 percent, up from 2.1 percent previously and well above the central bank’s 2 percent inflation target.
That combination — of resilient growth and sticky inflation — explains the Fed’s more cautious approach.
In fact, some officials thought that the Fed should not cut 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.
