(Reuters) -The U.S. Federal Reserve cut interest rates on Wednesday and signaled it will slow the pace at which borrowing costs fall any further given a relatively stable unemployment rate and little recent improvement in inflation.
The reduction by the central bank's Federal Open Market Committee in the benchmark policy rate to the 4.25%-4.50% range was opposed by Cleveland Fed President Beth Hammack, who preferred to leave the policy rate unchanged.
U.S. central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025. That is half a percentage point less in policy easing next year than officials anticipated as of September.
Fed Chair Jerome Powell said at a press conference after the release of the FOMC statement that it's too soon to say what President-elect Donald Trump's proposed economic policies will do to the economy or how that might bear on Fed policies. Policymakers want to see more progress on bringing inflation down as they consider the path of future rate cuts, he said.
MARKET REACTION:
STOCKS: The S&P 500 turned 1.5% lower after the news
BONDS: The yield on benchmark U.S. 10-year notes rose to 4.49%. The 2-year note yield rose to 4.35%
FOREX: The dollar index extended 1.8% higher, while the euro extended a loss to -1.19%.
COMMENTS:
MICHELE RANERI, HEAD OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO
“The latest decrease represents yet another sign that the Fed is comfortable with the impact of their gradual interest rate cuts seen to date.“
“It could also signal that the Fed anticipates that a continuation of these gradual cuts will likely show a similarly favorable impact to the economy broadly. While interest rates associated with credit cards, mortgage, and auto loans may not see significant immediate impact, as a result of this cut, consumers should continue to monitor them and ensure their overall credit profile is in the best possible shape so that they are able to take advantage of lower rates as they float down.”
SEEMA SHAH, CHIEF GLOBAL STRATEGIST, PRINCIPAL ASSET MANAGEMENT, LONDON (by email)
"The decision to cut rates today is not a surprise in itself. But, in light of the significant revisions to the projections, it does suggest that this was a reluctant reduction – one designed to give markets a bit of comfort as the Fed lays the groundwork for a more hawkish approach to policy in 2025. Certainly, the economic and inflation backdrop is not one that screams a need for meaningful policy stimulus, while the incoming administration may give them a severe inflation headache next year. The bias should still be further monetary easing, but caution and patience are clearly required at this stage."
JACK MCINTYRE, PORTFOLIO MANAGER, BRANDYWINE GLOBAL (by email)
"The actual rate cut of 25 basis points was the least important component of the December FOMC meeting. It was already priced by the markets. And the Fed didn’t disappoint. However, when you include the forward guidance components, it was a “hawkish cut.” Stronger expected growth married with higher anticipated inflation—it’s no wonder the Fed reduced the number of expected rate cuts in 2025. The results of this meeting raise the question: if the market wasn’t expecting a rate cut today, would the Fed actually have delivered one? I suspect not. Not surprisingly, there was a dissenter. Thus, the Fed has entered a new phase of monetary policy, the pause phase. The longer it persists, the more likely the markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025."
ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS
"This was a hawkish cut, as I think is clear. It was really interesting that a new voting member dissented right away, so that's interesting. But if you look at the changes to the statement of economic projection, they really had no choice. They've raised their forecasts for inflation for both PCE, core PCE, this year, next year, the year after. They've cut unemployment, they've increased GDP. So as you look at all the changes that they made, it's very clear that the economy is running a lot hotter than their previous projection. And that has got to contribute to their desire to potentially pause."
GENNADIY GOLDBERG, HEAD OF U.S. RATES STRATEGY, TD SECURITIES, NEW YORK
“The Fed has sent a signal that they're not going to be quite as dovish as they've been in the past, that they are leaning towards fewer cuts next year, and I think that's a signal for markets to continue to price in even fewer than two and possibly move in the direction of none if the data comes in strong enough.”
“The Fed is not willing to keep cutting if they don't see inflation coming down enough, and their summary of economic projections suggested that they still expect inflation at two and a half percent on core PCE by the end of next year.”
“The takeaway here is somewhat higher for longer rates, and you do see risky assets not loving this particular backdrop... Rates are moving higher but the saving grace for rates is that they've already been selling off for the last week or so, already expecting a relatively hawkish Fed, and it sounds like the Fed really delivered on the hawkishness.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
"Basically there were no surprises. They cut by 25 basis points, indicating only two rate cuts next year, also indicating a pause, probably in January and maybe extended into the first quarter.
But the market is turning south now, and the reason for that is the pace of rate cuts has been reduced, a pause is at hand and uncertainty over inflation is certainly on the minds of the Fed."
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
"It looks like some early worries about tariffs could be creeping into the Fed’s projections. They’re penciling in fewer rate cuts in 2025, slightly higher inflation, and a modest increase in the unemployment rate. The Fed can cut back on the pace of rate cuts thanks to a strong economy. In 2019 the Fed cut rates after the trade war started taking a toll on growth, treating any inflationary pressure as temporary. The year 2025 is a very different setup, though. In 2019, inflation was below target. Now it’s still above target. Rates are still restrictive even with the cuts, but it’s better to slow the pace now instead of maintaining this pace only to find they need to backtrack."
(Compiled by the Global Finance & Markets Breaking News team)
