Slower progress on inflation translates into a slower pace of rate cuts, especially as economic growth is fast.
The US Federal Reserve has cut interest rates but indicated it will slow the pace at which borrowing costs fall further, as the unemployment rate remains relatively stable and little progress is made in recent inflation.
“Economic activity has continued to expand at a robust pace” with an unemployment rate that “remains low” and inflation that “remains somewhat elevated,” the Federal Open Market Committee said of the central bank's rate setting in the statement. their latest policy on Wednesday.
“In considering the rate and timing of changes as well as the target area… the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” said i in new language that establishes a moratorium on rate cuts beginning at the January 28-29 meeting.
US central bankers now predict that they will only make two quarter-percent rate cuts by the end of 2025.
That's fifty points less in policy easing next year than officials had expected since September, with the Fed's inflation projections for the first year of the new Trump administration jumping from 2.1 percent in their earlier projections to 2.5 percent now – well above the median. bank target 2 percent.
“From now on, it is appropriate to proceed cautiously and look for an improvement on inflation … from now on, we are in a place where the risks are in balance,” Fed Chairman Jerome Powell said at press conference following the end of the central bank's two-day policy meeting
Powell described the latest rate cut as a “closer call” and noted that a slower pace of projected rate cuts next year reflected higher inflation readings in 2024.
Slower progress on inflation, which is not seen returning to the 2 percent target until 2027, translates into a slower pace of rate cuts.
Fed officials also raised their estimate of the long-term neutral interest rate – the rate that is thought to neither stimulate nor inhibit the economy – to 3 percent.
The reduction in the benchmark policy rate to the range of 4.25 percent to 4.5 percent was opposed by the president of the Federal Reserve Bank of Cleveland, Beth Hammack, who preferred to leave the policy rate unchanged.
“Although the Fed chose to end the year with a third consecutive rate cut, it appears that its New Year's resolution is for a more aggressive pace,” said Whitney Watson, global co-head and co-senior -chief investment officer of fixed income and liquidity solutions for Goldman Sachs Asset Management. Watson said “we expect the Fed to choose a rate cut in January, before starting their easing cycle in March. “
Trump's uncertainty
The new policy rate is now a percentage point below the peak reached in September when officials concluded that inflation was dependent on a return to the 2 percent target and that there were risks to the labor market of keeping monetary policy too tight for too long.
Core measures of inflation since then, however, have moved largely sideways, and persistently low unemployment and stronger-than-expected economic growth have fueled debate among policymakers over whether monetary policy as tight as was thought.
The latest quarterly projections are the first since President-elect Donald Trump won the November 5 election, which introduced a new level of uncertainty into the economic outlook as the his campaign promises for tax cuts, tax increases and a crackdown on illegal immigration – aspects of which analysts see as inflation.
Trump will not be in office until January 20, and Fed officials have said they cannot base monetary policy on campaign proposals that may or may not be implemented.
However, Fed staff appear to have found different scenarios, and policymakers' projections show growth still above potential at 2.1 percent next year, inflation remain above the target for another two years, and the unemployment rate not to rise above 4.3 percent.
