Investing.com -- The Federal Reserve reduced its benchmark interest rate by 25 basis points on Wednesday, marking the third consecutive cut but signaling caution about the pace of future reductions.
As widely expected, the Federal Open Market Committee (FOMC) lowered the federal funds rate to a target range of 4.25%-4.5%. This brings the rate back to its December 2022 level, when the Fed was raising rates to combat inflation.
While the decision itself held little surprise, the focus was on the Fed’s guidance amid persistent inflation and steady economic growth—conditions that typically don’t align with easing monetary policy. In its updated “dot plot” of individual rate projections, the Fed now anticipates just two rate cuts in 2025, halving the four reductions projected in September.
Assuming cuts are made in 25-basis-point increments, the FOMC foresees two additional reductions in 2026 and one more in 2027. The committee also raised its estimate of the long-term “neutral” rate to 3%, up slightly from its previous forecast.
“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Chair Jerome Powell said at his post-meeting news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
For the second consecutive meeting, a dissenting vote emerged. Cleveland Fed President Beth Hammack opposed the rate cut, preferring to keep the previous policy stance. In November, Governor Michelle Bowman also dissented, becoming the first governor since 2005 to vote against a rate decision.
Strategists comment on Fed's hawkish cut
UBS: “There is a risk that the Fed does not cut in March: If the inflation data come in hotter or there is unexpected fiscal stimulus (e.g., Trump administration stimulus through reconciliation), the Fed could hold off on a March cut. If the Fed were to forego a cut in March, it would be challenging to get 100bps of cuts for the year.”
“Overall, we believe investors should anticipate a deceleration in the pace of rate cuts in 2025 and near-term volatility as markets recalibrate the Fed’s standpoint. But, while the pace of rate cuts may now be slower than expected, with the Fed reiterating that policy remains restrictive, the direction of travel remains clear.”
Yardeni Research: “We think that the stock market might remain sloppy through January. Some investors might be planning to take their substantial profits early next year rather than now to defer capital gains taxes.”
“We can't rule out a 10% stock market correction, but we would view that as a buying opportunity rather than as a reason to panic out of the market since we don't expect a recession or a bear market. We are still targeting 7000 on the S&P 500 by the end of next year.”
Goldman Sachs: “The Fed leadership appears to share our dovish economic views that inflation is headed back to target and that labor market cooling still merits attention, and does not share the view some participants have voiced that the funds rate might be close to neutral—Powell said four times that policy is still “meaningfully restrictive.” But other Fed officials proved to be more hawkish than we anticipated, and it seems increasingly possible that the risk or realization of tariffs could restrain the FOMC from cutting.”
Wells Fargo (NYSE:WFC): “[The[ FOMC meeting leads us to believe that, barring some dramatic unexpected development, the Committee likely will keep rates on hold at its next meeting on January 29. However, we believe the FOMC will continue to ease policy next year, albeit at a slower pace than over the past few months.”
Barclays (LON:BARC): “We retain our baseline projection that the FOMC will cut rates only twice, by 25bp, next year, in March and June, with core PCE inflation rising again in H2 25 amid increased import tariffs and tighter immigration restrictions. We then expect the FOMC to resume its rate-cutting campaign around mid-2026, with two 25bp cuts that year, bringing the target range to a modestly restrictive 3.25-3.50%.”