The Federal Reserve cut interest rates by quarters but signaled a slower pace of easing

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The Federal Reserve cut its benchmark interest rate by a quarter of a percentage point but signaled a slower pace of easing next year, sending the dollar higher and U.S. stocks lower.

The Federal Open Market Committee voted on Wednesday to reduce federal funds proportion to 4.25-4.5%, the third consecutive cut. The decision was not unanimous, with Cleveland Fed President Beth Hammack casting a dissenting vote in favor of keeping interest rates steady.

Officials’ economic forecasts released alongside the interest rate decision showed a smaller decline than previous forecasts for 2025, underscoring policymakers’ concerns that cuts Rapid borrowing costs could undermine efforts to cool price growth across the world’s largest economy.

The US dollar rose sharply after this decision, government bond yields also increased and Wall Street stocks slid.

The Fed’s goal is to put enough pressure on consumer demand and business activity to boost growth inflationary return to the US central bank’s 2% target without harming the job market or the broader economy.

Officials now expect to cut the benchmark interest rate by 0.5 percentage points next year to 3.75-4%, down from the full percentage point drop predicted in the “chart dot” in September. Four officials decided on a one-time cut or no further cuts next year.

Most see operating rates falling to 3.25-3.5% by the end of 2026, also higher than forecast three months earlier.

They also raised their inflation forecasts as food and energy prices fall to 2.5% and 2.2% in 2025 and 2026, respectively, and predicted the unemployment rate would stabilize at 4.3 % over the next three years.

US government bonds came under selling pressure immediately after the Fed’s decision, with the policy-sensitive 2-year Treasury yield rising 0.07 percentage point to 4.31% – reversing a small decline earlier in the session.

In currency markets, the dollar rose 0.7% against a basket of six other currencies. Wall Street’s S&P 500 stock index fell 0.5%.

In a sign that the Fed is preparing to skip interest rate cuts at upcoming meetings, the FOMC revised its language regarding future changes to its policy settings. in a statement on Wednesday.

“In considering the extent and timing of additional adjustments to the target range of the federal funds rate, the committee will carefully evaluate upcoming data, the evolving outlook and the balance of risks, ” it said.

Wednesday’s decision was not the first this year to be opposed by a Fed official, after Michelle Bowman opposed a half-point cut in September. It was the first time a governor voted against a decision since 2005.

Wednesday’s 25% point cut was widely expected by financial markets, but comes as officials debate how quickly inflation is falling, following recent data. shows that progress towards the 2% target has slowed. The core personal consumption expenditures price index, the Fed’s preferred measure of inflation that strips out food and energy prices, rose at an annual rate of 2.8% in October.

the Fed kicked off a new rate-cutting cycle in September with a bumper half-point cut, but labor market concerns have since eased and the economic outlook has brightened. That healthy state of the US economy has changed the calculations of officials as they try to achieve a “neutral” rate that does not limit or promote growth too high.

The central bank has described the recent interest rate cuts as a policy “recalibration” that reflects its success in reducing inflation from a peak of around 7% in 2022. However , the threshold for future rate cuts will move higher over time as policy rates approach neutral estimates, especially if the economy retains its strength

Fed officials again raised their estimate for a neutral long-term interest rate, with a majority now setting the rate at 3%. This time last year, they estimated the number at 2.5%.

The Fed meeting comes just weeks before Donald Trump returns to the White House, vowing to raise taxes, deport immigrants and cut taxes and regulations. Recent economists polled of the Financial Times said this policy mix could trigger a new round of higher inflation and hit growth.

Fed officials said they have not yet incorporated Trump’s potential policy changes into their economic and interest rate forecasts.

Additional reporting by Harriet Clarfelt in New York