The Federal Reserve rolled out its third consecutive interest rate cut Wednesday afternoon, a move widely anticipated by economists and financial markets, though perhaps more compelling was what the U.S. central bank signaled about its monetary policy ambitions in 2025.
Key Facts
- The Federal Open Market Committee lowered the target federal funds rate by 25 basis points from 4.5%-4.75% to 4.25%-4.5%, adjusting the range for what’s nominally known as interest rates as the Fed-determined rate widely impacts borrowing costs throughout the country.
- That brings rates down to their lowest level since February 2023, down a full percentage point from the 5.25%-5.5% range they were from July 2023 through September.
- Economists at the world’s three largest investment banks – Bank of America, Goldman Sachs and JPMorgan Chase – and derivatives traders all agreed a 25 basis point cut was the most likely outcome Wednesday.
- The Fed also revealed its quarterly summary of economic projections, which includes where each central banker expects interest rates to end up in 2025.
- The median Fed staff forecasts calls for rates to end 2025 at 3.75%-4%, meaning just two more 25 basis point cuts are on the table, a decrease from the 3.25%-3.5%, or four cuts, forecasted in September.
Will Interest Rates Come Down Further In 2025?
There was a clear consensus on what the Fed will announce about its immediate rate decision Wednesday, but what it’d signal moving forward was more up in the air. Economists at BofA, Goldman and JPMorgan all expected the median projection to shrink from the prior forecast of four 25 basis-point cuts next year to three, projecting an end-of-2025 target range of 3.5%-3.75%. The market had been less convinced about even that slower pace of cuts, with the FedWatch Tool ascribing 3.75%-4% and 4%-4.25% as the most likely outcomes by the end of next year. Regardless, it’s clear Americans will need to get used to higher rates over the longer term, with rates highly likely to remain above 3% for an extended period, a threshold that was never hit between 2009 and 2021.
What To Watch For
If Fed Chairman Jerome Powell divulges any thoughts about the incoming presidential administration’s impact on the central bank at his afternoon press conference, a hot-button topic following campaign trail comments from President-elect Donald Trump teasing a threat to Fed independence. “There will probably be plenty of questions about the election and what it means for Fed policy and Fed independence, though we doubt we’ll learn much from that discussion,” according to JPMorgan’s chief U.S. economist Michael Feroli.
-Jason Schenker, Forbes Dec 15, 2024
