The Federal Reserve lowered interest rates on Wednesday, but policymakers signaled caution about additional rate cuts next year in the face of stubborn inflation.
The central bank lowered its benchmark interest rate by a quarter percentage point to a range of 4.25% to 4.5%. Rates have fallen by a full percentage point since September, making it cheaper to get a car loan, finance a business or carry a balance on your credit card.
But on average, members of the Fed's rate-setting committee said they expect borrowing costs to fall by only another half percentage point in 2025. That's less than three months ago when they were projecting a full percentage point in rate reductions next year.
"It's kind of common sense that when the path is uncertain, you go a little bit slower," Fed chairman Jerome Powell said Wednesday. "It's not unlike driving on a foggy night or walking into a dark room full of furniture."
Cleveland Federal Reserve Bank president Beth Hammack dissented from Wednesday's rate cut, saying she would have preferred to leave rates unchanged.
The hawkish forecast from Fed officials triggered a selloff in the stock market. The Dow Jones Industrial Average tumbled more than 1,100 points, or nearly 2.6%, while the S&P 500 index plunged nearly 3%.
While inflation has fallen sharply since hitting a four-decade high in 2022, progress on prices has slowed in recent months. The annual inflation rate in November was 2.7% — slightly higher than the month before.
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'Like an MMA fighter'
Fed officials say they're determined to bring inflation down further, while acknowledging it's been a lengthy and exhausting battle. Members of the rate-setting committee now think it will be 2027 before inflation falls to the Fed's 2% target.
"I feel like an MMA fighter who keeps getting inflation in a choke hold, waiting for it to tap out, yet it keeps slipping out of my grasp at the last minute," Fed governor Chris Waller said in a speech this month. "But let me assure you that submission is inevitable. Inflation isn't getting out of the octagon."
The Labor Department's most recent inflation report did show some long-awaited progress on housing costs. Rent increases in November were the smallest in nearly three-and-a-half years. But the price of new and used cars continued to climb. And grocery prices notched their biggest increase in 22 months.
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High grocery prices have been a persistent complaint, and likely contributed to Donald Trump's victory in the November election.
"I won on the border and I won on groceries," the president-elect told NBC's Meet the Press earlier this month. "When you buy apples, when you buy bacon, when you buy eggs, they were double and triple the price over a short period of time. And I won an election based on that."
Grocery prices have risen 22% since President Biden took office, while average wages have risen 19% during that time.
Inflation could rise under Trump 2.0
Economists warn that some of Trump's policy proposals — including tariffs and mass deportation — could lead to higher inflation. Fed Chair Jerome Powell has said it's too early to speculate about that. It's another reason, though, for the central bank to be cautious about further cuts in interest rates.
Fed officials also feel like they can afford to take their time in lowering rates because both the job market and the overall economy have been resilient.
"Most forecasters have been calling for a slowdown in growth for a very long time and it keeps not happening," Powell said. "The U.S. economy is just performing very, very well — substantially better than our global peer group."
While the overall economy has performed well, high interest rates have been a drag on certain sectors — especially manufacturing and the housing market. U.S. factories have been in a slump for most of the last two years, according to the Institute for Supply Management. And sales of existing homes are on track for their slowest year in nearly three decades, according to Fannie Mae.
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