The Federal Open Market Committee (FOMC) lowered its overnight borrowing rate to a target range of 4.25%-4.5%, marking the third consecutive reduction and one that comes with a cautionary tone about additional cuts in coming years.
Chair Jerome Powell stated, “Today was a closer call but we decided it was the right call.” The Fed indicated that it probably will only lower twice more in 2025, according to its closely watched “dot plot” matrix of individual members’ future rate expectations.
The FOMC also jacked up its projection for full-year 2024 gross domestic product growth to 2.5%, half a percentage point higher than September, but expects GDP to slow down to its long-term projection of 1.8% in the ensuing years.
Inflation remains above target, with headline and core inflation estimates pushed higher to respective rates of 2.4% and 2.8%, slightly higher than the Fed’s 2% goal. Despite this, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy.
The decision comes as President-elect Donald Trump has indicated plans for tariffs, tax cuts, and mass deportations that could be inflationary and complicate the central bank’s job. Powell said, “We need to take our time, not rush and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’ve been implemented.”
The Fed will have cut benchmark rates by a full percentage point since September, but markets have taken the opposite tack, with mortgage rates and Treasury yields rising sharply. The policy-sensitive 2-year Treasury yield jumped to 4.3%, putting it above the range of the Fed’s rate.
The FOMC adjusted the rate it pays on its overnight repo facility to the bottom end of the fed funds rate, effectively setting a floor for the funds rate.
Source: https://www.cnbc.com/2024/12/18/fed-rate-decision-december-2024-.html