Bold interest rate decision December 2024:

WASHINGTON – The Federal Reserve cut its key interest rate by a quarter of a percentage point on Wednesday, the third reduction in a row and one that struck a note of warning about further reductions in coming years.

In a move widely anticipated by markets, the Federal Open Market Committee cut its overnight lending rate to a target range of 4.25%-4.5%, back to the level it was in December 2022, when interest rates were on the move higher.

While there was little intrigue surrounding the decision itself, the main question had been what the Fed would signal about its future intentions as inflation remains steadily above target and economic growth is quite solid, conditions that do not usually coincide with policy easing.

In delivering the 25 basis point cut, the Fed indicated it was likely to cut only twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations. The two cuts indicated a halving of the committee’s intentions when the plot was last updated in September.

Assuming quarter-point increases, officials indicated two more cuts in 2026 and another in 2027. Longer term, the committee sees the “neutral” funds rate at 3%, 0.1 percentage point higher than the September update, as the level has gradually drifted higher this year.

For the second meeting in a row, an FOMC member dissented: Cleveland Fed President Beth Hammack wanted the Fed to maintain the previous interest rate. Gov. Michelle Bowman voted no in November, the first time a governor voted against an interest rate decision since 2005.

The fed funds rate determines what banks charge each other for overnight lending, but also affects a variety of consumer debt, such as auto loans, credit cards and mortgages.

The post-meeting statement changed little except for an adjustment regarding the “scope and timing” of further rate changes, a slight change in language from the November meeting.

The cut even came as the committee raised its projection for full-year gross domestic product growth to 2.5%, half a percentage point higher than in September. But in subsequent years, officials expect GDP to slow to its long-term projection of 1.8%.

Other changes in the summary of economic projections led the committee to lower its forecast for unemployment this year to 4.2%, while headline and core inflation, according to the Fed’s preferred gauge, were also pushed up to respective estimates of 2.4% and 2.8%, slightly higher than the September estimate and above the Fed’s target of 2%.

The committee’s decision comes as inflation not only remains above the central bank’s target, but also while the economy is expected by the Atlanta Fed to grow at a 3.2% rate in the fourth quarter and unemployment has hovered around 4%.

While these conditions would be most consistent with the Fed raising or keeping rates unchanged, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had picked up only “slightly” in recent weeks, with signs of easing inflation and slowing hiring.

Fed Chairman Jerome Powell has indicated that the rate cuts are an attempt to recalibrate policy as it does not need to be so restrictive under current conditions.

With Wednesday’s move, the Fed will have lowered benchmark interest rates by a full percentage point since September, a month in which it took the unusual step of cutting by half a point. The Fed generally likes to move up or down in smaller quarter-point increments as it weighs the impact of its actions.

Despite the aggressive moves lower, the markets have taken the opposite path.

Both mortgage rates and Treasury yields have risen sharply over the period, possibly indicating that markets don’t think the Fed will be able to cut much more. The policy-sensitive 2-year Treasury note last yielded 4.215%, placing it in the upper range of the Fed’s interest rate move on Wednesday.