The Federal Reserve on Wednesday cut its key interest rate by 25 basis points, marking the third cut in a row. However, the move was accompanied by a cautious message regarding the possibility of further reductions in the years ahead. As expected, the Federal Open Market Committee lowered the overnight borrowing rate to a target range of 4.25-4.5 percent.
This brings the benchmark policy rate back to its December 2022 level, when it was on an upward trajectory. While the rate cut itself was largely predictable, the bigger focus was on the Fed's guidance about its future plans, which dented investors' confidence with all three major indexes ending in red.
Fewer Rate Cuts Next Year
With inflation remaining stubbornly high and above the Fed's 2% target, and the economy showing steady growth—factors that typically don't align with policy easing—questions lingered about the central bank's next steps.
Federal Reserve Chair Jerome Powell said that additional cuts to borrowing rates would depend on achieving further progress in reducing persistently high inflation. His comments reflected the growing recognition among policymakers of the potential for significant economic shifts under the Trump administration.
Powell's clear and repeated emphasis on the need for caution moving forward shook Wall Street, causing a sharp drop in stock prices, a rise in bond yields, and prompting investors to lower their expectations for how much borrowing costs might decrease in the year ahead.
The Dow dropped 1,123.03 points, or 2.58%, closing at 42,326.87, marking its longest losing streak since an 11-day decline in 1974. Wednesday's drop was its steepest since August and only the second time this year it has fallen by 1,000 points in a single session.
The S&P 500 fell 2.95% to finish at 5,872.16, while the Nasdaq Composite slid 3.56% to 19,392.69, with losses accelerating toward the end of the trading day.
The Federal Reserve suggested it is likely to reduce rates only twice more in 2025, as outlined in the closely monitored "dot plot" reflecting individual members' projections. These two expected cuts mean a 50 percent reduction in the committee's plans compared to its September update.
Assuming each cut is a quarter-point, officials projected two additional reductions in 2026 and one more in 2027. Over the long term, the committee estimates the "neutral" funds rate at 3 percent, an increase of 0.1 percentage points from the September forecast, reflecting a gradual upward shift throughout the year.
Cautious Approach
Powell extensively discussed the progress in reducing inflation since its peak in 2022, as well as its recent stagnation, noting that shelter costs, in particular, have declined more slowly than the Federal Reserve had anticipated.
While expressing confidence that inflationary pressures would continue to ease, Powell also acknowledged that Federal Reserve staff and policymakers were beginning to consider the potential impact of President-elect Donald Trump's proposed policies—such as increased tariffs, tax cuts, and stricter immigration measures—on the economic outlook.
Additionally, policymakers' perception of inflation risk rose significantly, with a separate measure of uncertainty also showing a marked increase compared to the outlook issued in September, prior to the U.S. presidential election on November 5.
Powell attributed these changes primarily to evolving economic data. However, analysts viewed this as the early stages of grappling with Trump's policies, which many believe could heighten inflationary pressures.
The revised outlook underscores the potential hurdles Trump could encounter in fulfilling key campaign promises. A stricter Federal Reserve policy is likely to keep critical consumer interest rates, such as mortgage rates, high. Meanwhile, slower progress in reducing inflation could weaken his commitment to bringing down prices.
