The Federal Reserve reduced the federal funds rate by 25 basis points on Wednesday, bringing the target range to 4.25%-4.5%. While the rate cut aligned with market expectations, a more cautious economic outlook and revised projections for future rate cuts sent markets sharply lower.
- The rate cut was not unanimous, with Cleveland Fed President Beth M. Hammack dissenting, preferring to keep rates steady.
Statement: The Federal Open Market Committee (FOMC) highlighted that economic activity continues to grow at a solid pace. Labor market conditions have eased somewhat, with a slight uptick in the unemployment rate, while inflation has moderated but remains elevated.
- The Fed reiterated its dual mandate to achieve maximum employment and a 2% inflation rate over the longer run. However, the committee expressed uncertainty about the economic outlook, citing risks to both sides of its mandate.
Projection: The Fed’s updated economic projections surprised markets, showing fewer rate cuts in 2025, with the federal funds rate expected to end that year at 3.9%, up from the 3.4% projected in September. Inflation forecasts for 2025 rose to 2.5% from 2.1%.
- Unemployment and GDP projections were adjusted slightly to 4.3% and 2.1%, respectively. Highlighting a stronger economy than their September projection.
Presser: At a press conference, Fed Chair Jerome Powell defended the rate cut amid higher inflation expectations, stating, “We’re significantly closer to neutral. At 4.3 percent and change, we believe policy is still meaningfully restrictive.”
- He added that future rate cuts would depend on progress on inflation and continued labor market resilience.
Market Reaction: Markets reacted negatively to the updated projections. The Dow Jones Industrial Average plunged more than 1,100 points, extending its losing streak to 10 sessions—the longest in 50 years.
- Bond yields also rose, with the 10-year Treasury note climbing to 4.493% from 4.384% the previous day.
Bottom Line: The Fed delivered the expected rate cut, but its acknowledgment of a stronger economy and persistent inflation suggests rates will stay higher for longer. This reality has unnerved markets, intensifying concerns about tighter financial conditions heading into 2024.
