Fed Cuts Interest Rates to Support Maximum Employment and Low Inflation
The Federal Reserve has announced a widely expected decision to lower interest rates by another quarter point, in support of its dual goals of maximum employment and inflation at a rate of 2 percent over the longer run. This decision was made with an uncertain economic outlook, and the risks to both sides of its dual mandate are roughly in balance.
The Fed announced that it will lower the target for the federal funds rate by 25 basis points to a range of 4.25 percent to 4.50 percent, matching the rate cut seen in early November. With this rate cut almost universally expected, the focus was on Fed officials’ latest economic projections.
Economic Projections
The latest projections suggest that rates will be in a range of 3.75 percent to 4.0 percent by the end of 2025, compared to the range of 3.25 percent to 3.50 percent forecast in September. This indicates fewer than previously forecast rate cuts next year, with just two rate cuts expected compared to the four previously forecast.
The forecast for fewer rate cuts comes as Fed officials expect inflation to come in hotter than previously estimated in 2025, with consumer price growth expected at 2.5 percent compared to the 2.1 percent forecast in September. Fed officials also revised their forecast for GDP growth in 2025 upwardly to 2.1 percent from 2.0 percent and revised downward their forecast for the unemployment rate to 4.3 percent from 4.4 percent.
Uncertainty and Outlook
The Fed noted that it will carefully assess incoming data, the evolving outlook, and the balance of risks when considering the extent and timing of additional adjustments to the target range for the federal funds rate.
The decision to lower rates at this meeting was not unanimous, as Cleveland Fed President Beth M. Hammack preferred to leave rates unchanged. The Fed’s next monetary policy meeting is scheduled for January 28-29, with CME Group’s FedWatch Tool currently indicating an 88.5 percent chance the central bank will leave rates unchanged.
Conclusion
In conclusion, the Fed’s decision to cut interest rates by another quarter point is aimed at supporting its dual goals of maximum employment and low inflation. With an uncertain economic outlook and risks to both sides of its dual mandate roughly in balance, the Fed will continue to monitor data and adjust its monetary policy as needed.
FAQs
Q: What was the Fed’s decision regarding interest rates?
A: The Fed decided to lower the target for the federal funds rate by 25 basis points to a range of 4.25 percent to 4.50 percent.
Q: What is the purpose of the rate cut?
A: The rate cut is aimed at supporting the Fed’s dual goals of maximum employment and low inflation.
Q: What is the current economic outlook?
A: The economic outlook is uncertain, with the risks to both sides of the Fed’s dual mandate roughly in balance.
Q: What is the likelihood of future rate cuts?
A: The CME Group’s FedWatch Tool indicates an 88.5 percent chance the Fed will leave rates unchanged at its next meeting.