The United States Federal Reserve cut interest rates on Wednesday and signaled that it will slow the pace of decline in borrowing costs, given the relative stability of the unemployment rate and the little recent progress in reducing inflation.
The central bank’s official interest rate fell to 4.25%-4.50%.
“Economic activity has continued to expand at a solid pace,” with the unemployment rate “remaining low” and inflation “remaining somewhat high,” the central bank’s Federal Open Market Committee said in its latest statement. monetary policy.
“In considering the scope and timing of further adjustments to the target range… the Committee will carefully assess incoming data, evolving outlooks and the balance of risks,” it said in a new wording setting out a likely pause to rate cuts starting with the January 28-29 meeting.
U.S. central bankers now forecast just two quarter-point rate cuts through the end of 2025.
The forecast assumes half a percentage point less monetary easing next year than officials anticipated in September, with the Fed’s inflation projections for the first year of President-elect Donald Trump’s new administration jumping from 2.1% to 2.1%. .5%, more than the central bank’s 2% target.
Slower progress in reducing inflation, which is not seen returning to the 2% target until 2027, translates into a slower pace of rate cuts and a slightly higher endpoint of 3.1%. which will also be reached in 2027, compared to the previously planned “terminal” rate of 2.9%.
Fed officials also raised their estimate of the neutral long-term interest rate to 3%.
Uncertainty about Trump
The new policy rate is now one percentage point lower than the peak reached in September, when authorities concluded that inflation was on track to return to the 2% target and that keeping monetary policy too tight for too long posed risks for the economy. labor market.
Since then, however, key inflation measures have moved largely sideways, and low unemployment and stronger-than-expected economic growth have sparked debate among central bankers over whether rates were as restrictive as they were supposed to be. thought, a debate reflected in the steady rise of the long-term estimate of the neutral rate over the past year from 2.5% to 3%.
The latest quarterly projections are the first since President-elect Trump’s victory in the Nov. 5 election, which introduced a new level of uncertainty to the economic outlook given his campaign promises of tax cuts, tariff hikes and a tough crackdown on unauthorized immigration, aspects that some analysts consider inflationary.
Trump is inaugurated on Jan. 20, and Fed officials have said they cannot base monetary policy on campaign proposals that may or may not be implemented.
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