MNI: Fed Lowers Rates 25BPS, Sees Two '25 Cuts; One Dissent
The Federal Reserve reduced interest rates by a quarter point as expected Wednesday but revised lower the number of cuts needed next year to just two from four at the September meeting as inflation projections were bumped significantly higher.
Cleveland Fed President Beth Hammack dissented against the move, preferring to keep rates on hold, and three other Fed officials agreed, according to the dot plot.
The FOMC statement did not alter its description of the economy, repeating that inflation remains "somewhat elevated." But the committee added it was mulling the "extent and timing" of additional adjustments in rates, a possible hint of a looming slowdown or pause in rate cuts.
U.S. central bankers revised up their inflation view for 2025 fairly sharply, now seeing headline and core PCE ending the year at 2.5%, up from 2.1% and 2.2% respectively as of September. Meeting participants also bumped up their view of GDP growth for next year by a tenth to 2.1%.
A further upward drift in official estimates of the nominal neutral rate of interest leaves the median estimate at 3.0%, compared with 2.5% a year ago. A higher neutral rate suggests the Fed doesn't need to cut rates quite as much as in past cycles.
TRUMP FACTOR
Since the Fed's last set of projections in September, inflation has proven stickier than policymakers had foreseen while the employment and growth backdrop remains fairly strong. The November CPI report released last week showed headline inflation rising 2.7% with core prices climbing 3.2%.
The Fed's rate cut, which brings the fed funds rate target range to 4.25%-4.5%, comes against the backdrop of elevated uncertainty surrounding the likely policy mix from the incoming administration of President-Elect Donald Trump.
Fed Chair Jerome Powell will likely be peppered with questions during his press conference on the expected effect of Trump's proposed tariffs and immigration restrictions. Thus far he has argued the central bank needs to see policies implemented and felt in the economy before it can react with any shift in policy signals.
Still, market participants generally view Trump's policies as potentially inflationary, and therefore likely to inclined Fed policymakers to slow the pace of rate reductions or even halt them altogether.
The FOMC also tweaked its offering rate on its overnight reverse repo facility by lowering it 5 bps to the bottom of the target range, saying in its statement it "intends to support effective monetary policy implementation and the smooth functioning of short-term funding markets."