Washington, Dec 19 (Reuters) – As expected, the U.S. Federal Reserve announced a quarter-percentage-point cut to interest rates on Wednesday. However, Fed Chair Jerome Powell emphasized that further rate reductions will depend on sustained progress in tackling persistent inflation, reflecting a cautious approach as the central bank grapples with evolving economic conditions.
Powell’s comments sent shockwaves through Wall Street, with stocks dropping sharply, bond yields rising, and market expectations for rate cuts in 2025 being dialed back. At a press conference following the Federal Open Market Committee (FOMC) meeting, Powell underscored that the central bank was entering a “new phase” and would proceed with caution on any further rate reductions.
“I think we’re in a good place, but from here on, it’s going to be cautious,” Powell stated, signaling a shift in the Fed’s approach. The rate cut brought the federal funds rate to a range of 4.25%-4.50%, following two years of aggressive hikes aimed at curbing inflation. Powell took the opportunity to reflect on inflation’s trajectory, noting that while price pressures have eased since their peak in 2022, recent months have shown little improvement, especially in areas like shelter costs.
Although Powell expressed confidence that inflation would continue to moderate, he acknowledged that policymakers were beginning to incorporate potential impacts from President-elect Donald Trump’s economic agenda, which includes higher tariffs, tax cuts, and stricter immigration policies. Powell noted that these factors may drive inflation higher and dampen the expected pace of rate cuts.
For the first time, Fed projections indicate that the core personal consumption expenditures (PCE) index, excluding food and energy costs, will remain at 2.5% through 2025—well above the Fed’s 2% target. Powell attributed this shift largely to new government policies under Trump, increasing uncertainty and inflation risks.
One dissent emerged within the Fed, as Cleveland Fed President Beth Hammack voiced her preference for leaving rates unchanged at this meeting, indicating differing views on the pace of policy easing.
The Fed’s projections now show just two quarter-percentage-point rate cuts in 2025, down from expectations of a full percentage point of easing just a few months ago. This change reflects the economic uncertainty surrounding Trump’s policies, with officials now anticipating that inflation will not return to the 2% target until 2027. As a result, the terminal rate—where the Fed expects rates to stabilize—has been revised upwards to 3.1% in 2027, compared to 2.9% in September.
In response to ongoing inflationary concerns and uncertainties about the new administration’s policies, Powell emphasized that the Fed would continue to monitor incoming data and adjust its approach accordingly. While the Fed remains optimistic about the economy’s growth, low unemployment, and overall stability, Powell cautioned that the path ahead would be shaped by both domestic and global factors, including the potential impact of tariff policies under Trump.
“This is very premature,” Powell said, referring to the uncertainty surrounding Trump’s tariffs. “We don’t know yet what will be tariffed, from what countries, for how long, and what size.”
The Fed’s more cautious stance highlights the challenges that lie ahead for economic policymakers, as they navigate the impact of both ongoing global economic shifts and the looming changes to U.S. fiscal policy under the next administration.
The future of U.S. interest rates remains uncertain, with inflation pressures and political developments likely to continue shaping the Fed’s decisions in 2025.
