Key takeaways from the Fed’s third rate cut

Washington (CNN) — The Federal Reserve on Wednesday cut interest rates by a quarter point, the third rate cut since it began to lower borrowing costs in September.

The central bank’s latest move leaves its benchmark lending rate at a range of 4.25%-4.5%, a two-year low.

The decision to cut was not unanimous, is an attempt to ease pressure on America’s economy from elevated interest rates to preserve the labor market’s health.

Fed Chair Jerome Powell said the latest rate cut was “a closer call,” adding that recent inflation readings were “the single biggest factor” on officials’ minds during the meeting. Cleveland Fed President Beth Hammack was the lone dissenter on Wednesday’s decision, preferring to keep rates at their current levels.

The Fed signaled in its policy statement that it is leaning toward holding rates steady in the future, since inflation remains stubbornly above the central bank’s 2% target. The US economy has also proved remarkably resilient in the face of elevated borrowing costs, giving the Fed some reassurance that it can stand pat without risking any undue economic damage.

Fed officials penciled in just two rate cuts for next year, according to their latest forecasts, down from the four they projected in September. Officials also project slightly stronger economic growth, slightly lower unemployment, and for inflation in 2025 to be higher than they previously thought.

The projections overall suggest Fed officials expect the US economy next year to be buoyant, with no recession in sight. They expect inflation to reach their target over a longer period than they previously estimated, not touching 2% until 2027.

Powell sang the US economy’s praises in his post-meeting news conference, saying its strength has been “the story” of the year. Powell affirmed the likelihood of fewer rate cuts next year that the projections showed.

That sent markets into a tailspin, with the Dow dropping by more than 1,000 points.

Some investors are bullish on the prospects of strong growth next year, which could come about from the policies of President-elect Donald Trump. The incoming administration promises extending the 2017 tax cuts and cutting down on regulations — policies poised to boost growth if they’re enacted.

However, Trump’s threat of massive tariffs on goods coming from Mexico, Canada and China could derail the Goldilocks economy the Fed has seen so far, since the stiff tariffs Trump has floated are widely expected to stoke inflation.

A former Fed president told CNN that the US economy has already achieved the exceptionally rare feat of a “soft landing” — a scenario in which inflation is tamed without a recession — and is now just a matter of sustaining it.

Here are key takeaways from the Fed’s third consecutive rate cut.

Powell on what could be in store for 2025

The US economy next year is widely expect to remain solid, according to the Fed’s own estimates and those of other economists.

Trump has indeed floated plans that could transform the economy, such as high tariffs and mass deportations, but it will generally take time for those plans, if they’re signed into law, to affect the broader economy.

But for now, the Fed sees a robust US economy with some stubborn price pressures in 2025.

“I think that the slower pace of cuts for next year really reflects both the higher inflation rate this year and the expectation inflation will be higher,” Powell said.

The Fed leader said that some officials already began to incorporate possible changes in trade policy in to their economic models. Officials regularly devise simulations to understand what the economy might look like in the future.

In September 2018, when the first Trump administration went on a tariff spree, slapping duties on foreign goods ranging from solar panels to washing machines, a Fed simulation deemed it appropriate to hike rates if foreign countries imposed retaliatory tariffs and if Americans also expected inflation to pick up, according to a declassified 2018 Fed document detailing policy alternatives known as the “tealbook.”

Powell continued to express that there are still many unknowns about Trump’s tariff plans, such as which goods will be tariffed and the duration of any duties, saying it “is not a question that’s in front of us right now.”

He didn’t rule out a rate hike in 2025.

Powell on US economic growth and the labor market

US economic growth this year has been healthy, driven by American shoppers continuing to open their wallets. Consumer spending, which accounts for about two-thirds of the US economy, has been boosted by a steady job market with historically low unemployment.
Businesses have also continued to invest in their operations throughout the year, according to Commerce Department data.

Powell said that persistent strength has been one key reason why long-term interest rates, tied to the benchmark 10-year US Treasury yield have trended up since the Fed’s first rate cut in September. That includes mortgage rates.

“Most forecasters have been calling for a slowdown in growth for a very long time, so we we’re now well into another year of growth” that looks strong, he said. “The US economy is just performing very, very well.”

Powell had a measured tone when describing the labor market, noting that it “is still cool by many measures” but “not cooling quick or in a way that really breaks.” He said that the labor market is not a source of inflation pressure, adding that the Fed isn’t aiming to see any further softening in activity, which could be either higher unemployment or slower monthly job market.

“This is a good labor market and we want to keep it that way,” Powell said.

Overall, America’s economy remains in good shape, but high inflation isn’t in the rearview mirror just yet. Recent inflation readings have reflected persistent price pressures in housing and a pick-up in prices for food and some goods.

Put together, economic data makes a strong case for the Fed to hold rates steady until inflation’s downward trend gets back on track. Officials’ latest projections show that inflation won’t reach the Fed’s target until 2027, a year later than what they estimated in September.

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