The Federal Reserve cut its key interest rate for the third consecutive time amid internal disagreement, but signaled a slower pace of rate cuts ahead.
The Federal Open Market Committee (FOMC) decided on Wednesday to reduce the interest rate by a quarter percentage point in a move that aligned with market expectations, setting it in the range of 4.25% to 4.50%. The decision was approved by a vote of 11 to 1, reflecting significant divisions among policymakers.
Voting Details and Internal Disagreements
For the first time since September 2005, one member of the committee voted against this decision. Beth Hammack, President of the Cleveland Federal Reserve Bank, preferred to maintain the current rate. This level of disagreement highlights the challenges facing the Federal Reserve in balancing inflation control with labor market support.
Looking Ahead: Limited Cuts on the Horizon
The Federal Reserve’s “dot plot” chart, which shows Fed officials’ expectations, indicates only two rate cuts in 2025, bringing the interest rate closer to the long-term target of around 3%. Four officials also stated they prefer no cuts next year.
Jerome Powell, Federal Reserve Chair, emphasized during the post-meeting press conference:
“We are well-positioned, and we need to wait and see how the economy evolves. We are at the upper range of the neutral rate.”
Economic Outlook and Inflation
The committee raised its economic growth forecast for 2025 by half a percentage point to 2.5%. However, inflation is expected to remain above the 2% target through 2027. The current inflation rate, measured by the Fed’s preferred metric, stood at 2.4% in November.
Federal Reserve’s Additional Actions
The Federal Reserve also announced it will continue reducing its balance sheet by allowing Treasury securities and mortgage-backed securities to mature without replacement. This quantitative tightening process continues as part of normalizing monetary policy following years of pandemic-era stimulus.
A Critical Period for the Federal Reserve
These decisions come at a sensitive time. Powell has only a few meetings remaining in his term as Chair, and President-elect Donald Trump has signaled he will appoint someone who favors lower rates. Markets are closely watching potential nominees, with speculation surrounding various candidates who support more accommodative monetary policy.
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Market Reaction
Following this announcement, the Dow Jones index rose 500 points, and Treasury yields mostly declined. However, uncertainty about the future path of monetary policy remains one of the main concerns in financial markets.
The impact of this meeting can be broadly explained in two directions:
Forex: Interest rate cuts typically put downward pressure on the US dollar because dollar-denominated asset yields decrease and capital flows toward other currencies. This has caused the dollar to weaken against other major currencies and created increased volatility in currency pairs.
Crypto: In the digital currency market, this rate cut has had a dual effect; on one hand, lower interest rates can increase risk appetite and demand for high-risk assets like Bitcoin, but on the other hand, since this move was already widely priced in, a sell-the-news reaction and price volatility were observed following the official announcement. Some assets like Bitcoin experienced a price increase of several thousand dollars last night but subsequently corrected.
