The Federal Reserve cut another 25 basis points from the benchmark interest rate at its December meeting, bringing the federal funds rate down to the range of 4.25% and 4.50%. But it disappointed financial markets with indications that it would only cut rates twice in 2025.
Fed Chair Jerome Powell emphasized that the U.S. economy was strong, and that inflation was falling, but not as fast as the Fed had originally expected. The improvements would allow the Federal Open Markets Committee (FOMC) to be cautious with future rate cuts. The two cuts indicated for next year would be half the number that many financial analysts were expecting.
Powell said in a press conference following the FOMC meeting that inflation has been cut in half in the past year, from 5.6% to about 2.8%, but progress in lowering prices has slowed in the second half of the year due in part to a stronger-than-expected economy. He predicted inflation would remain higher than originally expected next year, requiring greater caution in reducing rates.
“As long as the economy and the labor market are solid, we can be cautious as we consider further cuts,” Powell said.
The news sent Wall Street, which had expected more cuts in 2025, into a tailspin. The Dow Jones Industrial Average fell more than 1,100 points, or about 2.4%, on the news and the Fed’s cautious outlook for next year. The steep loss was the largest pullback since August and marked the first time the Dow has fallen for 10 straight days since 1974.
The 10-year Treasury yield jumped above 4.50%, in a sign of worry about financial uncertainty and sticky inflation. The yield increase is expected result in mortgage rates, which were already on the rise, jumping higher in the coming days.
The Fed’s announcement marks the third federal funds rate cut in the past four months, bringing the total reduction this year of 1%. The decision was almost unanimous with only one member of the FOMC, Beth M. Hammack, the president of the Federal Reserve Bank of Cleveland, voting against the move, preferring to leave the target range unchanged.
There were few changes in the statement from the FOMC on Wednesday after the December meeting, with the aim of protecting employment levels and reaching the 2% inflation rate intact. “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
After the announcement, housing industry leaders expected mortgage rates were destined to stay above 6% for the near future.
“The big news out of today’s Federal Reserve meeting was not that the Fed reduced short-term interest rates by an additional quarter point, which was widely anticipated,” said Marty Green, principal at the mortgage law firm of Polunsky Beitel Green, LLP. “Instead, the focus was on the Fed’s projected path for monetary policy in 2025 and 2026. If one thinks about the Fed as a skier navigating the descent of a mountain, the Fed has decided to follow the green trail, where there will be much more sideway movement, with an occasional drop, rather than the more downhill approach they were able to adopt in 2024. Longer-term interest rates, like mortgage rates, continue to reflect an expectation that rates will be closer to 7% than 6% well into 2025 based on the Fed’s projected path.”
