As widely expected, Federal Reserve (Fed) officials lowered interest rates again, marking the third cut this year—although markets wobbled based on projections of a slower pace of cuts going into 2025.
During its final meeting of the year, the Federal Open Market Committee (FOMC) lowered rates by a quarter-percentage point to 4.25% to 4.5%—cutting one full percentage point this year, with a half point down in September and a quarter point in November.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run and judges that the risks to achieving its employment and inflation goals are roughly in balance,” according to a statement. “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
Fed Chair Jerome Powell called Wednesday’s rate cut a “closer call” but “the right call,” aligning with the Fed’s two main goals—maximum employment and price stability.
“We see the risks as two-sided—move too slowly and needlessly undermine economic activity in the labor market, or move too quickly and needlessly undermine our progress on inflation,” he said. “So we’re trying to steer clear between those two risks.”
The rate cut decision had one dissenter, Cleveland Fed President Beth M. Hammack, who voted to maintain the rate at 4.5% to 4.75%.
Despite the three cuts in the second half of 2024, fewer cuts are expected next year, according to consensus projections by Fed members.
“We are at or near a point at which it will be appropriate to slow the pace of further adjustments,” Powell said.
Projection on inflation has “kind of fallen apart as we approach the end of the year”
According to the Fed’s Summary of Economic Projections (SEP), the cuts for 2025 and 2026 were pulled back compared to the September predictions, leaving the year-end rate a half-point higher in both years.
“We’ve had a year-end projection for inflation, and it’s kind of fallen apart as we approach the end of the year,” Powell said. “That might be the single biggest factor—inflation has once again underperformed relative to expectations.”
Inflation will remain between 2.5% and 3%—“way below what it was”—added Powell.
“We really want to see progress on inflation. We have been moving sideways on 12-month inflation,” he said. “As we go forward, we want to see further progress on bringing inflation down and keeping a solid labor market.”
Industry reactions were mixed following the Fed’s announcement.
Danielle Hale, chief economist at Realtor.com®, said that the pull-back in expected cuts for 2025 and 2026 underscores the Fed’s commitment to fully reigning inflation back to the 2% target and also acknowledges the stickiness of prices in recent inflation trends.
“The Fed’s inflation expectations were revised modestly higher, while unemployment projections were revised modestly lower in 2024 and 2025, and growth projections adjusted higher in the same periods,” she said. “I don’t expect to see a huge reaction from mortgage rates to this news because the market had largely already priced these expectations in. In short, the Fed’s current stance mirrors where the market had already moved.”
The yields on the 10-year Treasury moved upward after the Fed released its projections for fewer rate cuts in 2025, said Lisa Sturtevant, chief economist at Bright MLS.
“The relationship between the federal fund rate and mortgage rates has been unpredictable lately, and it seems as though expectations matter more than actions,” she said. “Since mortgage rates tend to follow Treasury yield, we could see mortgage rates increase slightly this week even after today’s rate cut announcement.”
At the National Association of REALTORS®, Chief Economist Lawrence Yun said that mortgage rates have “largely refused to budge,” despite the rate cuts.
“One reason is that consumer price inflation has not been fully contained, and slightly accelerated in the past two months,” he said. “Lending money over the longer term needs to compensate for future returned money’s loss of purchasing power.”
He predicted that more Fed rate cuts are likely in 2025 because consumer prices should calm down measurably, and jobs and inventory will drive home sales.
“The completion of new apartments are still strongly rolling in from the previous year’s high housing starts. The added supply will help cool rents. Therefore, the gap with the mortgage rates will not remain wide, which means mortgage rates will modestly trend lower,” Yun said. “Given that mortgage rates have stayed above 6% for more than two years, consumers are getting used to the new normal, especially considering that the 50-year average is 7.7%.”
The economy, inflation and Trump’s second term
Looking ahead to 2025, Powell is “very optimistic” about the economy. “Our policy is in “a really good place. I expect another good year next year.”
The “slower pace of cuts” for 2025 reflects the higher inflation reading this year, along with the expectation that inflation will be higher. Additional cuts would be triggered by further progress on inflation and continued strength in the labor market.
“As long as the economy and the labor market are solid, we can be cautious as we consider further cuts,” Powell said.
Though committed to reaching that 2% rate of inflation, Powell did not rule out a rate hike in 2025.
“You don’t rule things completely in or out,” he said. “That doesn’t appear to be a likely outcome. At 4.3%, that’s meaningfully restrictive, and I think it’s a well-calibrated rate for us to continue to make progress on inflation while keeping a strong labor market.”
Though inflation is “way down,” consumers are still feeling the high prices.
“What I think people are feeling right now is the effect of high prices—not high inflation,” said Powell. “The best we can do for them—and that is who we’re working for—is to get inflation back down to its target and keep it there so that people are earning big, real wage increases so that their compensation is going up faster than inflation. That’s what will restore people’s good feeling about the economy.”
Though at a slower pace than anticipated two years ago, inflation for housing services has come down quite steadily, said Powell.
“We’re unwinding from these large shocks that the economy got in 2021 and 2022 in, for example, housing services and insurance, where costs went up, and those are now being reflected, later, in housing insurance,” he said. “It’s real inflation, but it doesn’t portend persistently high inflation. So, we, and most other forecasters still feel like we’re on track to get down to 2%.”
Getting down to that 2% inflation goal might take another year or two, Powell added.
Though many variables change financial conditions, the Fed sees the effects they are hoping to see on the goal variables in the places where they expect to see it, according to Powell.
“Housing activity is very low, and that’s particularly significant because of our policy, so we think our policy is working. It’s transmitting and it’s having the effects on our goal variables that we would want,” he said.
In regard to tariffs, Powell said it is still too premature to make any conclusions.
“We don’t know what will be tariffed, from what countries, for how long, in what size. We don’t know if there will be retaliatory tariffs. We don’t know what the transmission of any of that will be into consumer prices.”
Echoing Powell’s points on the strong economy and solid job market, CoreLogic Chief Economist Dr. Selma Hepp said there are still many reasons for the Fed to be cautious about cutting interest rates.
“Despite the prospect of deportations and tariffs being discussed today, we won’t know the full impact until such measures are implemented. Potential policies that are being discussed by the incoming administration could apply inflationary pressure and keep the Fed on pause, or encourage the Fed to slower the pace of rate cuts.”
To view the full Federal Reserve press conference, click here.
