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Dive Brief:
- The The Federal Reserve cut the key interest rate by a quarter of a percentage point on Wednesday in its third straight cut since September, signaling it may slow the pace of easing in 2025 compared to its previous projection.
- The political leaders cut the federal funds rate to a range of 4.25% to 4.5% after weighing signs of a cooling labor market against data showing robust retail sales, strong economic growth and persistent inflation. In a mid-range forecast, Fed officials estimated they would cut the key rate a 3.9% at the end of next yearhalf a percentage point higher than its September forecast.
- “We are at or near a point where it will be appropriate to slow the pace of further tightening,” Fed Chairman Jerome Powell said during a news conference. “We have reduced our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” he said. Cleveland Fed President Beth Hammack cast the lone vote against the rate cut.
Diving knowledge:
pOil makers cut the benchmark interest rate despite signs that their nearly three-year fight to bring inflation down to their 2% target has stalled.
“We had an inflation projection for the end of the year, and it’s been breaking down as we get closer to the end of the year,” Powell said on Wednesday.
Compared to their forecasts in September, Fed officials raised the median projection for the core price index for personal consumption expenditures at the end of 2024 to 2.8% from 2.6%, and by by the end of next year to 2.5% from 2.2%.
“It’s been a little frustrating because while we’ve made progress, it’s been slower than we expected,” Powell said, referring to the central bank’s efforts to rein in inflation to 2 percent. “However, we are still on track” to meet the Fed’s target, he said.
The consumer price index increased at an annual rate of 2.7%. in November compared to 2.6% in the previous month. Core CPI, excluding volatile food and energy prices, rose at an annual rate of 3.3%.
The core PCE price index — a measure of inflation that the Fed tracks closely — rose to an annual rate of 2.8% in October from 2.7% in September, according to the Office of Economic Analysis.
Ahead of the FOMC’s two-day meeting, some Fed officials cautioned against cutting the key interest rate too quickly.
“Cutting the policy rate too quickly could fuel demand unnecessarily and potentially reignite inflationary pressures,” Fed Governor Michelle Bowman said on December 6.
“So we’re looking ahead and I’m looking at decision-making in the context of the FOMC, I would prefer that we proceed cautiously and gradually,” he said.
Bowman, warning of inflation, cast the only dissenting vote in September, when the FOMC cut the federal funds rate by half a point. He did not disagree when policymakers cut the prime rate by a quarter of a point on November 7.
Powell mentioned the softening of the labor market when explaining his confidence that price pressures will ease.
Unemployment has risen to 4.2% from 3.7% earlier this year, and policymakers cited a cooling labor market when they cut borrowing costs in September. Fed officials in their median estimate project that unemployment will end this year, next year and 2026 at 4.3%.
“You look at the labor market, it’s cooler by so many measures, a little cooler now than in 2019, a year when inflation was well below 2%,” he said. “It is not the source of inflationary pressures.”
As the Fed’s progress against inflation has stalled, retail sales, consumer sentiment and economic growth in recent months have shown no signs of weakening in favor of easing monetary policy.
Retail sales rose 0.7% last monthaccelerating from a 0.5% gain in October, the Commerce Department said on Tuesday.
Consumer spending has remained robust amid rising confidence.
Consumer confidence in November hit the top of the range for the past two years, the Conference Board said this month, citing its Consumer confidence index.
Consumer optimism for their finances over the next six months hit a new high, and the share of consumers anticipating a recession in the coming year fell to the lowest level since the Conference Board began follow up on this sentiment in July 2022.
Gross domestic product growth in 2024 has defied predictions of a recession. GDP rose at an annual rate of 2.8 percent in the third quarter after rising 1.4 percent in the first quarter and 3 percent in the second, according to the Office of Economic Analysis.
The Atlanta Fed on Wednesday upgraded its estimate of GDP growth in the current quarter to one annual rate of 3.2% from 3.1%.
“I feel very good about where the economy is, and frankly, I’m very optimistic about the economy,” Powell said.
“We’re in a very good place, our policy is in a very good place,” he said, adding “I expect another good year next year.”
