As expected, the Federal Reserve decided to lower interest rates by 0.25 percentage points on December 18.
This marks the third rate cut, following reductions of 0.5 percentage points in September and 0.25 percentage points in November.
However, the Fed indicated a more cautious approach to rate cuts next year, forecasting only two reductions, which is fewer than initially planned.
The New York stock market initially opened higher as investors awaited the last Federal Open Market Committee (FOMC) meeting of the year. However, stocks turned lower across the board as disappointment set in over the slower pace of next year’s rate cuts.
Interest Rates Return to the Level of December 2022
At its final meeting of the year, the Federal Open Market Committee (FOMC) lowered the federal interest rate from 4.50%-4.75% to 4.25%-4.50%.
This brings rates back to levels seen in December 2022, just before the Fed began narrowing the pace of its aggressive rate hikes.
The Fed embarked on its rate-hiking campaign in 2022 to combat post-pandemic inflation, starting with a 0.25 percentage point increase in March. Throughout 2022, the central bank raised rates by a total of 4.25 percentage points, including four 0.75 percentage point hikes and two 0.50 percentage point hikes in May and December.
Only Two Rate Cuts Projected for Next Year
The “dot plot,” which shows the Fed’s interest rate projections, now indicates only two rate cuts for the coming year.
This dot plot represents FOMC members’ rate forecasts as dots on a graph.
The current projection of two cuts is half the number anticipated in the September FOMC’s dot plot.
Looking further ahead, FOMC members expect two additional 0.25 percentage point cuts in 2026 and one in 2027.
The committee now estimates the “neutral” interest rate, which neither stimulates nor restrains economic growth, at 3%, 0.1 percentage point higher than their September assessment.
Call for a Rate Freeze
There were calls for a rate freeze at the latest FOMC meeting.
Cleveland Federal Reserve President Loretta Mester voted against the decision, arguing that the benchmark rate should be maintained at 4.50% to 4.75%.
In September, Fed Governor Michelle Bowman voted against the rate cut, advocating for a smaller 0.25 percentage point reduction. This marked the first time in nearly 20 years that the FOMC failed to reach a unanimous vote, and the December meeting also did not yield a unanimous decision.
Inflation Persists
The Fed’s cautious stance on future rate cuts stems from a relatively positive outlook for the U.S. economy.
The Fed raised the U.S. GDP growth rate forecast for the current year to 2.5%, up 0.5 percentage points from its September projection.
However, long-term growth is expected to slow to 1.8%, so neutral interest rates are necessary.
The Fed anticipates an unemployment rate of 4.2% this year. It also projects a 2.4% increase in the Personal Consumption Expenditures (PCE) price index, its preferred inflation gauge, and a 2.8% rise in core PCE, which excludes food and energy prices.
Inflation is now expected to be higher than the September forecast, pushing the timeline for achieving the Fed’s 2% inflation target further into the future.
Dow’s Losing Streak Extends to 10 Days
The New York stock market showed a downward trend as it neared the closing hour.
The Dow Jones Industrial Average fell 160.07 points (0.37%) to 43,289.83, marking its tenth consecutive day of losses. This is the longest streak since 1974.
The S&P 500, widely regarded as the best benchmark of overall market performance, declined 28.18 points (0.47%) to 4,022.43. The tech-heavy Nasdaq Composite dropped 91.34 points (0.45%) to 20,017.72.
Treasury yields climbed in response to the Fed’s decision.
The 10-year U.S. Treasury note yield rose 0.059 percentage points to 4.444%.
