The Federal Reserve on Wednesday announced its third consecutive interest rate cut of 2024, reducing its benchmark rate by 0.25 percentage points amid cooling inflation. Yet in a blow for borrowers, the central bank also projected that it will loosen rates less next year than previously expected.

The Fed lowered the federal funds rate — the interest rate banks charge each other for short-term loans — to a range of 4.25% to 4.5%, down from its previous target range of 4.5% to 4.75%. The decision comes after policymakers slashed rates by 0.5 percentage points in September, followed by a 0.25 percentage point drop in November. 

The Fed has now trimmed rates by 1 percentage point since September, offering relief to Americans carrying credit card balances and other debt.

Fewer rate cuts in 2025

At the same time, the Fed is now penciling in only two rate cuts in 2025, down from the four it had forecast in September when it last issued economic projections. The central bank is now projecting that the federal funds rate may sit at median level of 3.9% by the end of 2025, up from its earlier forecast of 3.4%.

The Fed is also projecting inflation could be higher in 2025, at 2.5%, than it had expected in September, when it forecast that price increases would slow to 2.1% next year.

Wall Street tumbled in Wednesday afternoon trading, with the S&P 500 closing down 178 points, or 2.9%, and the Dow Jones Industrial Average plunging 1,123 points, 2.2%. The tech-heavy Nasdaq composite index fell even more sharply on the day, sliding 716 points, 3.6%. 

“The market is forward-looking and ignored the good news of today’s rate cut and instead focused on the paucity of rate cuts for next year,” noted Chris Zaccarelli, chief investment officer for Northlight Asset Management, in an email. “[T]he market was underwhelmed by the likely future path of interest rates.”

Speaking in a Wednesday press conference, Federal Reserve Chairman Jerome Powell acknowledged that progress in driving inflation down to the central bank’s goal of a 2% annual rate has been slower than expected, with consumer prices in November rising 2.7% on a yearly basis, fueled by elevated housing and food costs. 

“I would say today was a closer call, but we decided it was the right call” to cut rates, Powell said about Wednesday’s rate cut. “The slower pace of cuts for next year reflects the higher inflation readings we’ve had this year.”

The Fed might opt to skip a rate cut in January, while resuming easing at its March meeting, said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, in an email. 

“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing,” Watson said.

New monetary policy phase

The rate cut, which was expected, was the “least important component” of today’s Fed meeting, noted Jack McIntyre, portfolio manager at Brandywine Global, in an email. Instead, Wall Street was focused on the Fed’s forecasts for 2025 and beyond, with the central bank’s new forecasts signaling the Fed has entered “a new phase of monetary policy, the pause phase,” McIntyre added.

Wednesday’s move marks the Fed’s final interest rate decision prior to President-elect Donald Trump’s Jan. 20 inauguration. While price increases have cooled from their June 2022 peak, opening the door to Fed rate cuts this year, inflation has remained sticky and well above the Fed’s 2% annual target. 

Given that inflation has been sticky this year, many analysts have predicted that the Fed was likely to make fewer rate cuts in 2025 amid concerns that could cause the economy to overheat. 

Still, the Fed has so far defied forecasters’ warnings that its rate hikes could trigger a recession.

The Fed’s first rate meeting of 2025 is scheduled for Jan. 28-29, or after Trump’s inauguration. About eight in 10 economists expect the Fed to hold rates steady at that meeting, according to financial data firm FactSet.

Powell’s bullish economic outlook

While Powell said that the slow progress in grinding down inflation has been “a bit frustrating,” he also sounded an optimistic note about the U.S. economy, stressing that the nation’s growth has far outpaced that of other developed economies. 

“It’s pretty clear we’ve avoided a recession — growth this year has been solid,” Powell said. “Again, the U.S. economy has just been remarkable,” while other countries have contended with slow growth and “struggles with inflation.”

He added, “I expect another good year next year.”

As far as Trump’s stated plans to enact broad-based tariffs, which many economists forecast could prove inflationary, if enacted, Powell said the Fed is taking a wait-and-see approach. The Fed is examining the potential impact from tariffs, but it will be “quite some time” until there are policies put into place by the second Trump administration for the central bank to examine, Powell added.

“We just don’t know very much at all about the actual policies — we don’t know how much will be tariffed, from which countries,” he noted. “We don’t know if there will be retaliatory tariffs.”