Federal Reserve Projects Slower Rate Cuts in 2025
The Federal Reserve has revised its forecast for interest rate cuts in 2025, predicting only two quarter-point reductions, down from its previous projection of four. This shift in expectations was revealed in the central bank’s latest medium-term projection for interest rates.
A Shift in Expectations
The Fed’s dot-plot, which represents individual members’ expectations for rates, indicates that officials anticipate the benchmark lending rate to fall to 3.9% by the end of 2025, equivalent to a target range of 3.75% to 4%. This marks a significant change from the Fed’s September projection, which forecast a full percentage point reduction in 2025.
Rate Cut Projections
At the Fed’s last policy meeting of the year, the committee cut its overnight borrowing rate to a target range of 4.25%-4.5%. A majority of officials, 14 out of 19, expect two quarter-point rate cuts or less in 2025. Only five members project more than two rate cuts next year. Looking ahead, officials anticipate two more cuts in 2026 and another in 2027.
Inflation and GDP Projections
The Fed’s latest projections also show slightly higher expectations for inflation, with headline and core inflation projected to reach 2.4% and 2.8%, respectively. Additionally, the committee has pushed up its projection for full-year gross domestic product growth to 2.5%, half a percentage point higher than in September. However, officials expect GDP growth to slow down to its long-term projection of 1.8% in the following years.
Unemployment Rate Projections
The Fed has lowered its estimate for the unemployment rate to 4.2%, down from 4.4% previously. This revised projection suggests a more optimistic outlook for the labor market.
Long-Term Projections
Over the longer term, the committee sees the “neutral” funds rate at 3%, 0.1 percentage point higher than the September update. This gradual increase in the neutral funds rate suggests a more cautious approach to monetary policy in the years to come.
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