The Federal Reserve cut interest rates for the third time this year but signaled the path forward will likely be more gradual – and less certain – than previously forecast. The Fed cut by a quarter percentage point today, following on the half point cut in September and a quarter in November.
Today’s statement saw very few alterations from the November meeting. Language was added that the Fed will consider “the extent and timing” of additional adjustments to interest rates, which Powell later clarified was meant to signal a slower pace of cuts moving forward. It is also worth noting that Cleveland Fed President Beth Hammack voted against today’s rate cut, preferring instead to keep rates unchanged.
The Fed also released an updated Survey of Economic Projections (the “Dot Plots”) showing their expectations on GDP, employment, inflation, and rates in the years ahead. Fed members paired back cut expectations in 2025, from four cuts forecast when projections were last released in September, to a more modest two cuts for 2025 projected today.
Justification for the slower pace of easing comes in the form of higher inflation expectations for 2025, with PCE prices now forecast to end this year at 2.4% and then rise in 2025 to 2.5% (back in September, the Fed forecast inflation to decline to 2.1% in 2025). Along with higher inflation expectations, the Fed is forecasting 2025 to see a slightly lower unemployment rate (now 4.3% from 4.4% in September) and slightly faster inflation-adjusted GDP growth (up to 2.1% from 2.0%).
Given the Fed has prioritized headline PCE prices as the best measure of inflation experienced by consumers – and with their forecasts today that these prices will rise, not fall, in the year ahead – it begs the question why the Fed believes that further rate cuts are warranted in 2025. The cooling labor market has brought the employment side of the Fed dual mandate into balance with inflation risks, and the Fed may be forced to choose if rising inflation trumps weaker jobs growth if (or when) push comes to shove.
