Federal Reserve cuts interest rates by a quarter point, but signals slower pace of easing

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The Federal Reserve cut its benchmark interest rate by a quarter percentage point but signaled a slower pace of easing next year, sending the dollar higher and U.S. stocks lower.

The Federal Open Market Committee voted Wednesday to cut the federal funds rate to 4.25-4.5 percent, its third straight cut. The decision was not unanimous: Cleveland Federal Reserve President Beth Hammack cast a dissenting vote, preferring to keep rates stable.

Officials’ economic projections released alongside the rate decision pointed to fewer reductions than previously forecast for 2025, underscoring policymakers’ concerns that cutting borrowing costs too quickly could undermine efforts to cool price growth in the world’s largest economy. The authorities also raised their inflation projections.

Federal Reserve chief Jay Powell said that after Wednesday’s cut, the central bank’s policies were “significantly less restrictive” and could now be “more cautious” in considering additional easing. He also characterized the December decision as a “closer call” than in previous meetings.

U.S. government bonds fell in price after the Federal Reserve’s decision, with the policy-sensitive two-year Treasury yield rising 0.08 percentage point to 4.33 percent. The dollar jumped 0.8 percent against a basket of six peers, while Wall Street’s S&P 500 stock index fell 0.7 percent.

In a sign that the Federal Reserve is preparing to skip rate cuts at upcoming meetings, the FOMC modified its language on future changes to its policy settings in a statement Wednesday.

The Federal Reserve’s goal is to apply enough pressure on consumer demand and business activity to push inflation back to the U.S. central bank’s 2 percent target without harming the labor market or the broader economy.

Officials now hope to reduce the benchmark rate by half a percentage point next year to 3.75-4 percent, below the full percentage point reduction forecast in the September “dot plot.” Four officials predicted one or no additional cuts next year.

Most saw the policy rate falling to 3.25-3.5 percent by the end of 2026, also higher than forecast three months earlier.

They also raised their inflation forecasts once food and energy prices are removed to 2.5 percent and 2.2 percent in 2025 and 2026, respectively, while predicting the unemployment rate would stabilize at 4.0 percent. 3 percent over the next three years.

“In considering the extent and timing of additional adjustments to the federal funds rate target range, the committee will carefully assess incoming data, evolving outlooks, and the balance of risks,” he said.

Wednesday’s decision was not the first this year that a Federal Reserve official opposed, after Michelle Bowman expressed disagreement with September’s half-point reduction. It was the first time a governor voted against a decision since 2005.

Wednesday’s quarter-point cut was widely expected by financial markets, but came amid a debate among officials about how quickly inflation was receding, after recent data suggested progress toward 2 percent target had slowed. The core personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge that excludes food and energy prices, rose at an annual rate of 2.8 percent in October.

The Federal Reserve began a new cycle of rate cuts in September with an extraordinary half-point cut, but fears about the labor market have since eased and the economic outlook has improved. That healthy state of the U.S. economy has changed the calculus for officials as they try to set a “neutral” rate that doesn’t cap growth or push it too high.

The central bank has described the recent cuts as a “recalibration” of policy that reflects its success in reducing inflation from a peak of around 7 percent in 2022. But the bar for future rate cuts will rise over time as that the policy rate is close to neutral estimates, especially if the economy maintains its strength

Federal Reserve officials once again raised their estimates of the long-term neutral rate, with a majority now putting it at 3 percent. Last year around this time they estimated it was 2.5 percent.

The Federal Reserve meeting came just weeks before Donald Trump returns to the White House, having promised to raise tariffs, deport immigrants and cut taxes and regulations. Economists recently surveyed by the Financial Times said the policy mix could trigger a new bout of higher inflation and hurt growth.

Fed officials have said they have not yet incorporated Trump’s potential policy changes into their economic and rate forecasts.

Additional reporting by Harriet Clarfelt in New York