Hawkish Federal Reserve Lowers Interest Rate by 25bps

The Federal Reserve lowered interest rates on Wednesday, but policymakers signalled caution about additional rate cuts next year in the face of stubborn inflation.

Members of the Fed’s rate-setting committee said they expect borrowing costs to fall by only another half percentage point in 2025. That’s less than three months ago when they were projecting a full percentage point in rate reductions next year.

“It’s kind of common sense that when the path is uncertain, you go a little bit slower,” Fed chairman Jerome Powell said Wednesday. “It’s not unlike driving on a foggy night or walking into a dark room full of furniture.”

Cleveland Federal Reserve Bank president Beth Hammack dissented from Wednesday’s rate cut, saying she would have preferred to leave rates unchanged.

The hawkish forecast from Fed officials triggered a selloff in the stock market. The Dow Jones Industrial Average tumbled more than 1,100 points, or nearly 2.6%, while the S&P 500 index plunged nearly 3%.

While inflation has fallen sharply since hitting a four-decade high in 2022, progress on prices has slowed in recent months. The annual inflation rate in November was 2.7% — slightly higher than the month before.

Fed officials say they’re determined to bring inflation down further, while acknowledging it’s been a lengthy and exhausting battle. Members of the rate-setting committee now think it will be 2027 before inflation falls to the Fed’s 2% target.

“I feel like an MMA fighter who keeps getting inflation in a choke hold, waiting for it to tap out, yet it keeps slipping out of my grasp at the last minute,” Fed governor Chris Waller said in a speech this month. “But let me assure you that submission is inevitable. Inflation isn’t getting out of the octagon.”

The Labor Department’s most recent inflation report did show some long-awaited progress on housing costs. Rent increases in November were the smallest in nearly three-and-a-half years. But the price of new and used cars continued to climb. And grocery prices notched their biggest increase in 22 months.