In This Article:
The Federal Reserve announced yet another interest rate cut of 25 basis points yesterday despite persistent inflation. This lowered the Fed funds rates to the 4.25-4.5% range, which is now at the same level as in December 2022.
Further, the central bank scaled back the number of cuts it projects for 2025, signaling caution. The “dot plot,” which maps out policymakers' expectations for where interest rates could be headed in the future, showed only two interest rate cuts for 2025. This is lower than the four estimated during the September FOMC meeting and would bring rates close to 3.9% by 2025-end.
Fed’s Dot Plot
Image Source: Federal Reserve
Fed chairman Jerome Powell said, “The slower pace of cuts for next year really reflects both the higher inflation readings we had this year and the expectation inflation will be higher.” Following this, the stock market plunged, with all major indexes ending the day in red. The rate-sensitive sectors, including the Financial Services, were among the worst performers in the S&P 500 Index.
Banks, the major constituents of the Financial Services sector, witnessed notable declines yesterday. The KBW Nasdaq Regional Banking Index and the S&P Banks Select Industry Index declined more than 5%. Shares of Wall Street biggies, including JPMorgan JPM, Bank of America BAC and Citigroup C, tanked more than 4%. Even regional bank stocks like Comerica CMA and KeyCorp KEY were down almost 5% yesterday.
What Else Did the Fed Signal?
In addition to next year’s reduction in interest rates, the Fed officials, through the dot plot, signaled two cuts in 2026 and 2027 each. This will bring the interest rates close to 3.4% by the end of 2026 (higher than the 2.9% previously forecasted during the September FOMC meeting) and 3.1% by 2027-end.
Additionally, the central bank came out with the latest Summary of Economic Projects (SEP). Per the latest SEP data, the U.S. economy is anticipated to grow at the rate of 2.5% this year and 2.1% in 2025.
Moreover, the Fed officials noted that “labor market conditions have generally eased, and the unemployment rate has moved up but remains low.” They lowered their expected unemployment rate to 4.2% for 2024 from 4.4% forecasted during the last update in September. Further, in 2025, the unemployment rate is estimated to be 4.3%.
The central bank increased the inflation target to 2.4% for 2024 from 2.3% predicted in September.
For 2025, the inflation will likely be 2.5%, a significant upward tick from the prior forecast of 2.1%. This indicates inflation is going to be stickier than previously expected. The Fed officials seem to have accounted for the incoming President’s potential policy-related decisions, including the stance on tariffs while predicting inflation for 2025.