The Federal Reserve executed a third successive 0.25% interest rate cut on Wednesday, signaling a more measured approach towards future reductions, despite ongoing inflation challenges and robust economic growth.
The Federal Open Market Committee’s decision adjusts the overnight borrowing rate to a target range of 4.25%-4.5%, a level previously seen in December 2022 when rates were climbing.
The rate cut decision garnered little surprise; however, investor focus centered on the Federal Reserve’s outlook for future policy, given the unusual landscape where inflation remains persistently above target and economic growth remains robust.
The Fed’s latest “dot plot,” a key measure of future rate expectations by individual members, hints at two potential reductions in 2025, a significant reduction from previous projections. The officials also project a continued cautious easing path, with expectations of two additional quarter-point rate cuts slated for 2026 and another reduction anticipated in 2027.
Over the long haul, the committee has adjusted its outlook on the “neutral” benchmark interest rate, setting it at 3%. This reflects a marginal increase of 0.1 percentage point from the September forecast, as rates have trended upward this year.
Federal Reserve Chair Jerome Powell stated post-decision that the reduction represents a full percentage point decrease from the rate’s peak, indicating a diminishing restrictive stance and allowing careful evaluation of future rate changes.
Moreover, Powell further mentioned that the Fed will proceed at a slower pace going forward.
The rate cut decision led to a sharp decline in stocks, with the Dow Jones Industrial Average (DJIA) dropping over 1,100 points, and a notable increase in Treasury yields. Market expectations for cuts in 2025 also shifted, as reflected by CME Group’s FedWatch tool.
