Even while economic data has been very choppy, the US Federal Reserve decided to match market expectations, cutting benchmark rates by 25 basis points.
The Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by 25 bps to 4-1/4 to 4-1/2 percent. The FOMC also said it would continue reducing its holdings of Treasury securities, agency debt, and agency mortgage‑backed securities. In total, the Fed has cut rates by 100 bps this year.
All FOMC members supported the decision except Beth M. Hammack who preferred to hold rates steady. Hammack is the relatively new President of the Federal Reserve Bank of Cleveland.
Fed Chairman Jerome Powell said the US economy was performing very well, far better than much of the rest of the world. At the same time, he committed to achieving the target rate of a 2% inflation rate and full employment – the Fed’s statutory mission.
The Fed’s current posture indicates several more cuts in 2025.
Some observers believe the Fed has cut rates too aggressively, with some aspects of the market showing signs of ongoing price increases. One of the most challenging aspects of the economy is the fact that mortgage rates have remained stubbornly high. As mortgages are based on the ten-year Treasury and not tied to Fed rates, markets have actually pushed lending rates higher – perhaps anticipating sticky inflation.
Following the announcement, Treasuries jumped in price, and stock markets sagged. In effect, the markets’ initial reaction was that they disagreed with the Fed’s decision.
At this presser, Chair Powell noted that the Consumer Price Index indicates that total PCE prices rose 2.5% over the 12 months ending in November and that, excluding the volatile food and energy categories, core PCE prices rose 2.8%. He stated:
“We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will assess incoming data, the evolving outlook, and the balance of risks. We are not on any preset course.”
Part of the challenge for the Fed is the next administration is promising significant economic policy changes, including more aggressive tariffs. While there has been plenty of chatter about the impact of any punitive tariffs, nothing can be judged until they actually take place. Add the changing economic policy to geopolitical risk, and there are many obstacles the Fed will need to avoid in the coming 12 months. Whether the decision to cut now was the right one will only be clear next year.