Key Points

  • The Federal Reserve cut its key interest rate by 25 basis points on Wednesday, marking the third consecutive reduction since September, while signaling that the pace of easing in 2025 may be slower than previously expected.
  • Policymakers, weighing signs of a cooling labor market against data showing strong retail sales, solid economic growth, and persistent inflation, lowered thefederal funds ratetarget range to 4.25%-4.5%. According to the median projection, Fed officials expect to reduce the key rate to3.9%by the end of next year, 50 basis points higher than the September forecast.
  • Fed Chair Jerome Powell said at a press conference: "We are at or near the point where it will be appropriate to slow the pace of further adjustments." He added: "We have cumulatively cut the policy rate by a full percentage point from its peak, and the current policy stance is significantly less restrictive." Cleveland Fed President Beth Hammack cast the sole dissenting vote against this cut.

In-Depth Analysis

Despite signs that the Fed's nearly three-year effort to bring inflation down to its 2% target has stalled, policymakers decided to lower the benchmark rate.

Powell said Wednesday: "Our forecast for inflation at the end of the year has, to some extent, fallen short as the year draws to a close."

Compared with the September projections, Fed officials raised their median forecast for the core Personal Consumption Expenditures (PCE) price index at the end of 2024 from 2.6% to 2.8%, and increased the forecast for the end of 2025 from 2.2% to 2.5%.

Powell said of the central bank's efforts to bring inflation down to 2%: "It's somewhat frustrating because we've made progress, but at a slower pace than we would have liked." He said: "Nevertheless, we remain on track toward the Fed's goal."

According to data from the U.S. Bureau of Labor Statistics, theConsumer Price Index (CPI) rose 2.7% year over year in November, up from 2.6% in the previous month. Excluding volatile food and energy prices, core CPI rose 3.3% year over year.

According to data from theBureau of Economic Analysis, the inflation gauge closely tracked by the Fed—the core PCE price index—rose slightly to 2.8% year over year in October from 2.7% in September.

Ahead of the Federal Open Market Committee's (FOMC) two-day meeting, some Fed officials had warned against lowering the key rate too quickly.

Fed Governor Michelle Bowman said on December 6: "Lowering the policy rate too quickly could unnecessarily stimulate demand and potentially reignite inflationary pressures."

She said: "Therefore, as we look ahead and consider decisions within the FOMC framework, I tend to favor a cautious and gradual approach."

Bowman cast the sole dissenting vote in September when the FOMC cut rates by 50 basis points due to inflation concerns. She did not dissent when policymakers cut rates by 25 basis points on November 7.

Powell cited a softening job market in explaining his confidence that price pressures would decline.

The unemployment rate has risen from 3.7% at the start of the year to 4.2%, and policymakers cited a cooling labor market as a reason for lowering borrowing costs in September. In their median projections, Fed officials expect the unemployment rate to remain at 4.3% at the end of this year, next year, and in 2026.

Powell said: "Look at the labor market—it's cooling by many measures—and it's now slightly softer than in 2019, when inflation was well below 2%. It is not a source of inflationary pressure."

Amid stalled progress in the Fed's fight against inflation, retail sales, consumer confidence, and economic growth in recent months have shown no signs of weakness that would support loosening monetary policy.

Data released Tuesday by the U.S. Commerce Department showed thatretail sales rose 0.7% month over month last month, accelerating from a 0.5% increase in October.

Consumer spending remains strong against a backdrop of rising confidence.

The Conference Board said this month that consumer confidence in November hit the upper end of its range over the past two years, citing itsConsumer Confidence Index, noting that consumers' optimism about their financial situation over the next six months reached a new high, and the proportion of consumers expecting a recession in the coming year fell to the lowest level since the organization began tracking this sentiment in July 2022.

Gross domestic product (GDP) growth in 2024 has defied recession forecasts. According to data from theBureau of Economic AnalysisGDP grew at an annualized rate of 2.8% in the third quarter, following growth of 1.4% in the first quarter and 3% in the second quarter.

The Atlanta Fed on Wednesday raised its GDP growth estimate for the current quarter from 3.1% to anannualized rate of 3.2%。

Powell said: "I feel very good about the current state of the economy, and frankly, I am very optimistic about the economy."

He said: "We are in a very good position, and our policy is in a very good position as well." He added: "I expect next year to be another good year."