Federal Reserve Implements 25 Basis Point Rate Cut Amidst Hawkish 2025 Outlook

Introduction

On December 18, 2024, the Federal Reserve reduced the federal funds rate by 25 basis points, adjusting the target range to 4.25%–4.50%. This decision aligns with market expectations; however, the Fed's projections indicate a more cautious approach to monetary easing in 2025, signaling fewer rate cuts than previously anticipated.

Details of the Rate Cut

The Federal Open Market Committee (FOMC) unanimously agreed to lower the benchmark interest rate by 0.25%, marking the fourth reduction since September 2024. This cumulative decrease of 100 basis points aims to support economic growth amid persistent inflationary pressures.

Revised Economic Projections

In conjunction with the rate cut, the Fed released updated economic projections:

• Inflation: The median forecast for core Personal Consumption Expenditures (PCE) inflation in 2025 has been raised to 2.5% from the previous estimate of 2.1%, reflecting concerns about sustained price increases.

• Interest Rates: Projections now suggest only two 25 basis point rate cuts in 2025, a reduction from the four cuts anticipated earlier, indicating a more restrained approach to monetary easing.

Market Reactions

The Fed's announcement prompted significant movements across financial markets:

• Equities: Major U.S. stock indices experienced notable declines, with the S&P 500 dropping 3% and the Nasdaq Composite falling 3.6%, as investors reacted to the less accommodative monetary policy outlook.

• Bonds: U.S. Treasury yields rose, with the two-year yield increasing to 4.35%, reflecting expectations of a slower pace of rate cuts.

• Currency: The U.S. dollar strengthened, reaching a two-year high against a basket of major currencies, as the hawkish stance bolstered demand for the greenback.

Implications for Future Monetary Policy

Federal Reserve Chair Jerome Powell emphasized the need for continued vigilance in combating inflation, stating that further progress is required before considering additional rate reductions. This cautious approach suggests that the Fed is prioritizing price stability over aggressive monetary easing, aiming to balance economic growth with inflation control.