The Federal Reserve cut interest rates by a quarter of a point but signaled it would slow the pace of easing next year, sending the dollar soaring to a two-year high and triggering falls in U.S. and international stocks.
The Federal Open Market Committee on Wednesday voted to lower the benchmark interest rate to a range of 4.25% to 4.5%, the third consecutive cut. Cleveland Fed President Beth Hammack voted against the measure, preferring to keep rates unchanged.
Officials’ 2025 outlook for interest rates indicates a smaller reduction than previously expected, underscoring concerns about lingering inflation. In a sign of these concerns, policymakers also raised their inflation expectations for next year.
“This was an unabashedly hawkish message from the Fed,” said Aditya Bhave, senior U.S. economist at Bank of America. It added that officials’ expectations for two quarter-point rate cuts in 2025, rather than a rate cut, represented unjustified policy. “Wholesale shift”.
JPMorgan Chase, one of the largest participants in the U.S. bond market, noted that money markets currently point to a rate cut of just 0.31 percentage points in 2025. The bank said this was “substantially more hawkish” than the expected 0.75 percentage point, underscoring its size. of shift.
Wall Street stocks plummeted after the decision, with the S&P 500 index down nearly 3% and the tech-heavy Nasdaq Composite Index down 3.6%. 2024’s strong stock rally saw many of the biggest winners exit. Elon Musk’s automaker Tesla fell 8.3%, Facebook parent company Meta fell 3.6% and Amazon fell 4.6%.
Stocks of small and medium-sized publicly traded companies, considered particularly sensitive to fluctuations in the U.S. economy, were hit hard, with the Russell 2000 index down 4.4%.
Stock markets in Europe and Asia fell on Thursday, with benchmark indexes in South Korea and Taiwan falling 1.8% and 1.6%, respectively.
The European benchmark Stoxx 600 was down 1.3% in early trading, while the FTSE 100 was down 1.2%.
Prices of US government bonds also fell, with the policy-sensitive two-year government bond yield rising 0.11 percentage point to 4.35%. The dollar rose 1.2% against a basket of six currencies, hitting its highest since November 2022.
The U.S. currency has strengthened since Donald Trump’s election victory last month on hopes that tariffs would deliver a new shock to inflation, but the Fed’s decision on Wednesday will “add fuel to the fire.” said Mike Pugliese, senior economist at Wells Fargo.
The South Korean won fell to its lowest value in 15 years against the dollar, and the Japanese yen fell 0.5% to 154.5 yen.
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Following Wednesday’s action, Fed Chair Jay Powell said the Fed’s policy settings were “significantly less restrictive” and that policymakers could be “more cautious” when considering additional easing. He said there is. He said the December decision was a “closer call” than previous meetings.
Powell added that risks to the labor market are “reducing” while inflation remains “flat.”
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The Fed’s goal is to put enough pressure on consumer demand and business activity to bring inflation back to the central bank’s 2% target without causing widespread harm to the job market or the economy.
The Core Personal Consumption Expenditures Price Index, the Fed’s recommended measure of inflation that subtracts food and energy prices, rose at an annual rate of 2.8% in October.
Concerns that inflation could stall above 2% prompted Fed officials to cut interest rates by 0.5 percentage point in 2025, bringing the central bank’s key policy rate to 3.75%. The forecast is that it will be 4%.
Powell also noted that officials are starting to include assumptions about President Trump’s planned policies in their forecasts.
The four policy makers decided to either cut the rate by one quarter of a point next year or not. Fed officials fully predicted the rate of interest rate cuts in their last “dot plot” released in September.
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Forecasts on Wednesday showed most officials expect the policy rate to fall to 3.25% to 3.5% by the end of 2026, also higher than previously expected.
It also raised its core inflation forecast to 2.5% and 2.2% in 2025 and 2026, respectively, and predicted that the unemployment rate would remain stable at 4.3% over the next three years.
The Fed began its rate-cutting cycle in September with a deep half-point cut, but since then concerns about the labor market have subsided and the economic outlook has brightened. The economy’s resilience in the face of rising borrowing costs has changed the calculus of officials trying to find a “neutral” interest rate that won’t throttle growth or get too high.
The central bank described the recent interest rate cuts as a “recalibration” of monetary policy, reflecting its success in bringing inflation down from its peak of around 7% in 2022.
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Chairman Powell said Wednesday that the Fed is entering a “new stage in the process” as borrowing costs approach neutral interest rates.
Fed officials have raised their expectations for the neutral rate again, with a majority now saying it is 3%, up from 2.5% a year ago.
The Fed meeting came weeks before President Trump returns to the White House, vowing to raise tariffs, deport immigrants and cut taxes and regulations. In a recent Financial Times poll, economists said this combination of policies could trigger a new surge in inflation and hurt growth.
Additional reporting by Eva Xiao in New York
