The U.S. Federal Reserve reduced its benchmark interest rate by 25 basis points (bp) on Wednesday (Thursday AEDT), marking the third consecutive rate cut.
However, policymakers signalled a more cautious approach to further reductions, projecting only two additional cuts in 2025, according to its "dot plot" projections.
Chair Jerome Powell acknowledged the significance of the decision, saying: "Today was a closer call but we decided it was the right call." He added that the Fed's policy stance is now "significantly less restrictive," allowing for a more measured pace in future adjustments.
The central bank revised its 2024 GDP growth forecast upwards to 2.5%, while projecting a slowdown to 1.8% in subsequent years. Inflation estimates were also raised slightly, with headline and core inflation expected to reach 2.4% and 2.8%, respectively, above the Fed’s 2% target.
Stock markets retreated after the announcement, as U.S. Treasury yields climbed. Futures pricing, based on CME Group’s FedWatch Tool, now indicates a single 25 basis point rate cut in 2025.
Powell said: "We moved pretty quickly to get to here. And I think going forward, obviously we're moving slower."
The decision comes amid mixed economic signals. While inflation remains above target and growth is solid, the Fed is wary of maintaining high rates that could stifle economic momentum.
The unemployment rate remains steady at 4%, and economic growth in the fourth quarter is projected at 3.2%, according to the Atlanta Fed.
Powell also noted the importance of adapting policy to current conditions, saying: "We think the economy is in a really good place. We think policy is in a really good place." Despite the cuts, rising Treasury yields and mortgage rates suggest markets remain sceptical of the Fed's ability to ease further.
The Fed has also adjusted the rate on its overnight reverse repo facility to align with the lower end of its target range, addressing market dynamics.
Looking ahead, Powell reiterated the Fed's focus on inflation progress before considering additional rate changes.