In its final monetary policy review for 2024, the US Federal Reserve dropped its benchmark interest rate by 25 basis points, to 4.25–4.50%, and it expects to cut rates less in 2025.
Following a two-day Federal Open Market Committee (FOMC) meeting, the US Federal Reserve issued its eighth and final monetary policy decision for 2024, cutting its benchmark interest rate by 25 basis points, or a quarter of a percentage point, to 4.25–4.50%. After beginning its policy easing cycle in September for the first time in four years, the US Fed chair Jerome Powell-led rate-setting panel lowered the federal funds rate for the third consecutive meeting.By the end of 2025, the US Fed only anticipates two quarter-percentage-point rate cuts.lower than the four rate cuts they had predicted in September. "The Committee will carefully evaluate incoming data, the changing outlook, and the balance of risks when determining the extent and timing of additional adjustments to the target range," the FOMC stated in its policy statement.
This is the last scheduled interest rate decision before Republican Donald Trump, whose economic policies include raising tariffs and deporting millions of undocumented workers, replaces departing Democratic President Joe Biden as the next US president.
During the post-policy press conference, US Fed Chair Jerome Powell stated that although US inflation has "eased significantly," it is still "somewhat elevated" in comparison to the US Fed's long-term aim of 2%."Significantly closer" to the end of the Fed's current easing cycle, he added.
1. In its final policy review for 2024, the US Fed lowers key interest rates by 25 basis points.
US Federal Reserve The central bank's key lending rate was lowered to between 4.25 and 4.50 percent by a vote of 11 to 1. At this week's meeting, Cleveland Fed President Beth Hammack, who joined the central bank earlier this year, expressed her disapproval and stated that she would have liked to keep rates unchanged.
"We have reduced our policy rate by a full percentage point from its peak with today's action, and our policy stance is now significantly less restrictive," stated Powell, the head of the US Federal Reserve.
Powell went on to say, "Therefore, we can be more cautious as we consider further adjustments to our policy rate."
Powell went on to say that the Fed is "on track to cut" and that interest rates are still "meaningfully" holding down economic growth. But before making further cutbacks, he said, officials would need to see greater progress on inflation. In order to fight the biggest inflation outbreak in almost 40 years, the US central bank has kept the key borrowing rate at the 23-year high for 14 months in a row from July 2023.
2. To slow down the pace of easing, the US Fed only plans to decrease rates twice in 2025.
Due to high inflation, the US Fed signaled increased prudence about how quickly it may continue to lower borrowing costs by limiting the number of cuts anticipated in 2025. Several US Fed members penciled in fewer rate cuts for next year than they had only a few months ago, according to new quarterly predictions.
The median estimate indicates that US Fed policymakers now anticipate the benchmark rate to average between 3.75 and 4 percent by the end of 2025, which would only require two quarter-percentage-point drops, or half of their September projections. Just five officials said they would prefer further cuts the next year.
3. US Fed raises GDP and inflation projections for 2025
Policymakers of the US Federal Reserve raised their forecast for headline US inflation to 2.5% in the upcoming year and do not anticipate it reaching 2% again until 2027. In good news for the biggest economy in the world, FOMC members increased their growth projections for 2025 to 2.1% and this year to 2.5%.
The Fed's most recent forecasts, according to Powell, "have core inflation coming down to 2.5 per cent next year." That would be a big step forward," he remarked. "There would be significant progress in bringing inflation down to that level. The majority of forecasts, including ourselves, continue to believe that we will hit 2%. From here, it could take a year or two.
According to at least one researcher, policymakers anticipate that the unemployment rate would be little lower this year than anticipated at 4.2% before increasing marginally to 4.3% in 2025 and 2026. The rate of unemploymentThe last two years have seen a nearly full percentage point increase in the unemployment rate. The Fed decided to lower its benchmark rate by 50 basis points in September, partly due to concerns over growing unemployment.
4. The US Fed modifies the RRP tool's rate and decreases the pace of balance-sheet runoff.
The US Federal Reserve dropped the rate on a facility that helps control its benchmark in addition to its primary interest-rate cut in an effort to maintain stable US funding markets. In comparison to the lower bound of the target range, it reduced the overnight reverse repurchase agreement facility's rate by five basis points.
The new RRP rate is 4.25 percent, which is in line with the lower limit for the first time since 2021, when combined with the Fed's decrease of the fed funds rate's total target range to 4.25 percent to 4.50 percent. By absorbing funds from sources outside the banking system, the facility aims to assist in lowering the Fed's target for the federal funds rate.
The action might be intended to avoid money market rate tightening. By pushing more money into bank reserves, it might also enable the Fed to further reduce its balance sheet. The US Fed also declared that it would lower the rate by 30 basis points that it pays lenders who use its overnight reverse repurchase facility.
"The Committee will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities," the US Fed stated in its policy statement. Beginning on June 1, the Fed had declared that it would slow down the rate at which it was reducing its balance sheet, allowing $25 billion in Treasury notes to mature each month instead of $60 billion.
5. Wall Street plummets due to the rate drop expectation; the Dow has its worst losing run since 1974, while the S&P 500 records its worst Fed day since 2001.
After predicting fewer interest rate reduction next year, the US Federal Reserve shocked US stock markets on Wednesday, sending most stocks plunging and US Treasury yields skyrocketing.The S&P 500 saw its largest loss on the day of a rate decision since 2001, according to Bloomberg.
The S&P 500 had its worst session since August when it dropped below the 6,000 mark. The largest decline in five months was 3.6% for the tech-heavy Nasdaq 100. It was the Dow's largest daily percentage decrease since early August and its eleventh straight day of losses, the longest losing run since 1974.
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