US Federal Reserve Cuts Interest Rate by 0.25%: Markets React Sharply

Fed Signals Slower Rate Cuts Ahead Amid Inflation Concerns and Economic Optimism

December 18, 2024: The US Federal Reserve announced a quarter-point interest rate cut on Wednesday, lowering the central bank’s key lending rate to a range of 4.25–4.50 percent. While this move was widely anticipated, the Fed surprised markets by signaling a reduced pace of rate cuts in the coming year.

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Policymakers voted 11-to-1 in favor of the rate cut, the Fed revealed in its statement. However, projections for 2025 now include only two quarter-point rate cuts, down from the four forecasted in September. This adjustment triggered a sharp sell-off in financial markets, with all three major Wall Street indices closing lower and US Treasury yields surging.

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Inflation Challenges and Economic Outlook

Federal Reserve Chair Jerome Powell acknowledged that while inflation has “eased significantly,” it remains “somewhat elevated” above the Fed’s long-term target of 2 percent. He expressed optimism about the US economy, stating that the Fed is “significantly closer” to concluding its current easing cycle.

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Despite progress in reducing inflation through interest rate hikes, recent data indicate an uptick in the Fed’s preferred inflation measure, raising concerns about whether the inflation battle is truly over.

According to Diane Swonk, KPMG’s chief economist, “FOMC members need to see additional improvements in inflation to continue cutting rates — full stop.”

Economic Projections: Growth, Inflation, and Unemployment

Updated economic forecasts suggest a mixed outlook:

Inflation: Headline inflation for 2025 is projected to rise to 2.5 percent, with the Fed not expecting a return to its 2 percent target until 2027.
Growth: Economic growth estimates were raised to 2.5 percent for 2024 and 2.1 percent for 2025, reflecting resilience in the US economy.
Unemployment: The unemployment rate is forecasted to be 4.2 percent in 2024, ticking up slightly to 4.3 percent in the subsequent years.

However, some analysts remain skeptical about the Fed’s optimism. “Rate cuts will come faster than the Fed expects, as unemployment tops the new forecast,” wrote Samuel Tombs, chief US economist at Pantheon Macroeconomics.

Political Transition and Market Reactions

This rate decision comes as outgoing President Joe Biden prepares to transfer power to Republican Donald Trump, whose economic policies—such as potential tariff hikes—could influence inflation and growth trajectories.

The Fed’s cautious stance reflects its effort to balance inflation control with sustaining economic growth. However, the signaling of fewer rate cuts has left markets uncertain about the near-term trajectory of US monetary policy.

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Federal Reserve rate cut, US interest rates, Jerome Powell inflation, US economic outlook, Wall Street reaction, 2024 US economy, inflation concerns, monetary policy update, US growth projections, unemployment forecast,

Misha Bhatia