On Wednesday, the Federal Reserve implemented a reduction in its benchmark lending rate by 25 basis points, signaling fewer anticipated cuts compared to projections made in September. The Federal Open Market Committee adjusted interest rates to a range of 4.25% to 4.50%, aligning with market expectations.
Previously, rates were cut by 50 basis points in September and by another 25 last month. The FOMC reiterated that, despite progress toward the 2% inflation target, inflation remains 'somewhat' elevated. Economic activity continues to expand at a 'solid' rate, though labor market conditions have 'generally eased' from earlier in the year.
The unemployment rate has edged higher, but it remains low. 'In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks,' stated the FOMC. Recent U.S.
data showcased that monthly consumer inflation picked up as anticipated in November, while producer prices saw a larger increase than forecasted. The updated Summary of Economic Projections from the FOMC revealed that members raised their median federal funds rate forecast for 2025 to 3.9%, up from 3.4% projected in September.
The rate expectations for 2026 and 2027 were also adjusted to 3.4% from 2.9% and 3.1% from 2.9%, respectively. 'While we don't think investors should rule out a January cut completely, with the Fed's preferred inflation rate remaining at 2.8% year-on-year, and expecting that (President-elect Donald Trump) will implement his inflationary political strategy, it is reasonable that the Fed will adopt a more cautious stance as the New Year approaches,' stated TD Economics Senior Economist James Orlando in a report. Projections for inflation, measured by personal consumption expenditures, have been raised to 2.4% from 2.3% for this year and 2.5% from 2.1% for 2025.
Core PCE inflation, excluding the volatile food and energy components, is now estimated at 2.8% for 2024, an increase from the 2.6% forecasted in September. The outlook for 2025 is pegged at 2.5%, compared to 2.2% previously. Both components' 2026 outlooks were also increased. The forecast for unemployment has been adjusted downward to 4.2% from 4.4% for 2024 and 4.3% from 4.4% for 2025.
Furthermore, members raised their economic growth outlook for the U.S. to 2.5% from 2% for this year, and to 2.1% from 2% for 2025, as indicated in the document. The next FOMC meeting is set for Jan. 28-29..