The Federal Reserve cut its benchmark interest rate for the third consecutive time on Wednesday, following previous reductions in September and November. The latest move narrows the interest rate gap between the U.S. and South Korea (currently at 3.0%) from 1.75 to 1.5 percentage points at the upper bound.
In a shift from its September outlook, the Fed now expects only two rate cuts in 2024, down from four, signaling a more cautious approach to monetary easing. Market observers have characterized this change as a hawkish rate cut decision, given that it reflects a more conservative path forward.
After its Federal Open Market Committee (FOMC) meeting, the central bank announced a 0.25 percentage point reduction in its benchmark rate, bringing it to a range of 4.25% to 4.50%. This is a total reduction of 1 percentage point since September when rates were in the 5.25% to 5.50% range. In September, the Fed implemented a big cut of 0.5 percentage points, followed by a 0.25 percentage point cut in November.
The Fed’s statement highlighted that while labor market conditions have generally eased since the beginning of the year, unemployment remains low despite a slight increase. Though inflation shows progress toward the Fed’s 2% target, inflation remains elevated.
Given the current economic data, Wall Street has expressed growing skepticism about the need for continued rate cuts. Inflation has stagnated above the Fed’s 2% target, and labor market conditions have proved more resilient than anticipated, leading to concerns that further easing might not be necessary. Hawkish members of the Fed, including Cleveland Fed President Loretta Mester, have echoed these concerns. Mester dissented from the rate cut decision and advocated for keeping rates unchanged.
The Fed’s latest Summary of Economic Projections (SEP) revised its outlook for 2024. The central bank now expects a benchmark rate of 3.9% by the end of next year, up 0.5 percentage points from the September projection of 3.4%. This adjustment reduces the expected rate cuts for the coming year from four to two.
Looking further ahead, the Fed has also raised its projections for the longer term. By the end of 2026, the central bank expects the benchmark rate to be 3.4%, up from 2.9% in the previous forecast. Similarly, the projection for 2027 has been increased to 3.1%, up from 2.9%.
The next meeting of the Federal Reserve is scheduled for January 28-29, just after the inauguration of President Donald Trump’s second term. Futures markets are currently pricing in an 81% probability that the Fed will keep rates unchanged during this meeting. Market participants are closely watching the March meeting, as the Fed is expected to carefully weigh inflation and employment data before making any further rate decisions. The economic policies of President-elect Trump, including his promises to implement aggressive tariffs, are also likely to play a role in the Fed’s decision-making process as it navigates the challenges ahead.