Interest rates will temporarily halt following a recent reduction by the Federal Reserve.
Fed Drops Another Rate Cut, But It's Not All Smooth Sailing
The U.S. Federal Reserve has once again lowered interest rates, bringing the total for this year to three cuts. As announced by the Federal Open Market Committee (FOMC), the new range is 4.25% to 4.5%, a reduction of 25 basis points. However, this decision wasn't unanimous, with FOMC member Beth M. Hammack opting for a rate pause. Analysts had predicted this move. The real buzz now is about the new rate projections from FOMC members, which everyone's eager to hear.
Originally, the Fed projected four rate cuts by 2025. But the latest median projection from Fed members is for a mere two cuts, totaling 50 basis points. Some experts believe a rate pause could be on the cards at the next meeting in late January, thanks partly to the U.S. Presidential inauguration around that time.
According to Michael Heise, Chief Economist at HQ Trust, "The specific measures of the new administration will likely not yet be clear at the next Fed meeting. So, it's quite probable that the Fed will hold off on making any changes."
Fed Grows Less Optimistic About Inflation
The Fed's newfound pessimism about inflation is partly due to President Trump's trade policies and immigration plans. These could potentially boost inflation in the U.S., requiring the Fed to maintain a tighter monetary policy next year, assuming the economy stays strong. However, if protectionism and retaliation from other countries weaken the U.S. economy, the Fed might face a tricky dilemma. It's tasked with both maintaining price stability and achieving full employment. In a high-inflation, slowing economy scenario, the mandate for price stability could argue against rate cuts, while the mandate for full employment could argue for easing.
For 2025, FOMC members are more concerned about inflation, with a median expected inflation of 2.5%, up from the previous 2.1%.
Robust Labor Market
The PCE price index, the Fed's preferred inflation measure, has been bouncing between 2.1% and 2.5% for several months, with the core rate fluctuating between 2.6% and 2.8%. Despite a slight cooling of the U.S. job market, it remains relatively strong. In November, 227,000 new jobs were created outside the agriculture sector, though this figure was influenced by hurricanes and strikes. The unemployment rate increased slightly from 4.1% to 4.2%.
[5]: https://www.usbank.com/articles/economy-and-markets/2025/feds-rate-decision-is-in-line-with-es mexspectation/
- In light of the Fed's growing pessimism about inflation and the potential impact of President Trump's trade policies and immigration plans, business analysts may want to closely monitor the finance sector for any adjustments in monetary policy.
- With the latest median projection from FOMC members revealing a more cautious approach towards rate cuts compared to their previous projections, the prospect of a rate pause or even a rate hike in the upcoming business engagements could be under careful consideration.
