Dive Brief:
- The Federal Reserve trimmed the main interest rate by a quarter percentage point Wednesday in its third straight reduction since September, while indicating that it may slow the pace of easing in 2025 compared with its prior projection.
- Policymakers cut the federal funds rate to a range between 4.25% and 4.5% after weighing signs of a cooling labor market against data showing robust retail sales, strong economic growth and persistent inflation. In a median forecast, Fed officials estimated that they would reduce the main rate to 3.9% by the end of next year, a half percentage point higher than their September forecast.
- “We are at or near a point at which it will be appropriate to slow the pace of further adjustments,” Fed Chair Jerome Powell said during a press conference. “We have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” he said. Cleveland Fed President Beth Hammack cast the sole dissenting vote against the rate cut.
Dive Insight:
Policymakers reduced the benchmark interest rate despite signs that their nearly three-year fight to push down inflation to their 2% target has stalled.
“We had a year-end projection for inflation, and it’s kind of fallen apart as we approach the end of the year,” Powell said Wednesday.
Compared with their forecasts in September, Fed officials increased the median projection for the core personal consumption expenditures price index at the end of 2024 to 2.8% from 2.6%, and for the end of next year to 2.5% from 2.2%.
“It’s been a bit frustrating because, while we’ve made progress, it has been slower than we had hoped,” Powell said, referring to central bank efforts to curb inflation to 2%. “Nonetheless, we’re still on track” toward reaching the Fed’s goal, he said.
The consumer price index rose at a 2.7% annual rate in November compared with 2.6% the prior month. Core CPI, excluding volatile food and energy prices, increased at a 3.3% annual rate.
The core PCE price index — a measure of inflation that is closely tracked by the Fed — edged up to a 2.8% annual rate in October from 2.7% in September, according to the Bureau of Economic Analysis.
Before the FOMC’s two-day meeting, some Fed officials cautioned against trimming the main interest rate too fast.
“Lowering the policy rate too quickly could unnecessarily stoke demand and potentially reignite inflationary pressures,” Fed Governor Michelle Bowman said on Dec. 6.
“So as we're looking forward and as I'm considering decision making within the FOMC context, I would prefer that we proceed cautiously and gradually,” she said.
Bowman, warning of inflation, cast the lone dissenting vote in September when the FOMC cut the federal funds rate by a half point. She did not dissent when policymakers trimmed the main rate by a quarter point on Nov. 7.
Powell cited the softening job market when explaining his confidence that price pressures will decline.
Unemployment has risen to 4.2% from 3.7% at the start of the year, and policymakers cited the cooling job market when reducing borrowing costs in September. Fed officials in their median estimate forecast that unemployment will end this year, next year and 2026 at 4.3%.
“Look at the labor market — it’s cooler by so many measures — now modestly cooler than it was in 2019, a year when inflation was well under 2%,” he said. “It’s not the source of inflationary pressures.”
As the Fed’s progress against inflation has stalled, retail sales, consumer sentiment and economic growth in recent months have shown no signs of the weakening that would bolster the case for loosening monetary policy.
Retail sales rose 0.7% last month, accelerating from a 0.5% gain in October, the Commerce Department said Tuesday.
Consumer spending has remained robust amid rising confidence.
Consumer confidence in November hit the top of the range during the past two years, the Conference Board said this month, citing its Consumer Confidence Index.
Consumer optimism for their finances over the next six months hit a new high and the proportion of consumers anticipating a recession during the next year fell to the lowest level since the Conference Board began tracking that sentiment in July 2022.
Gross domestic product growth in 2024 has defied predictions of a recession. GDP rose at a 2.8% annual rate during the third quarter after increasing 1.4% in Q1 and 3% in Q2, according to the Bureau of Economic Analysis.
The Atlanta Fed on Wednesday upgraded its estimate for GDP growth during the current quarter to an annual rate of 3.2% from 3.1%.
“I feel very good about where the economy is and, honestly, I’m very optimistic about the economy,” Powell said.
“We’re in a really good place, our policy is in a really good place,” he said, adding “I expect another good year next year.”
