Fed Holds Steady on Interest Rates, Eyes Inflation Concerns
The Federal Reserve has opted to keep the overnight benchmark rate unchanged, following a two-day meeting that concluded on Wednesday. This decision was largely anticipated, with futures on the federal funds rate already pricing in a steady rate for January. The central bank’s rate-setting Federal Open Market Committee lowered the benchmark overnight interest rate to the 4.25%-4.50% range, a move that was opposed by Cleveland Fed President Beth Hammack, who advocated for leaving the policy rate unchanged.
Inflation Remains a Key Concern
Despite the unemployment rate remaining low, the Fed highlighted that inflation remains somewhat elevated. This slower progress on inflation is expected to translate into a slower pace of rate cuts, with a marginally higher terminal rate of 3.1% projected for 2027. According to Dan Siluk, portfolio manager at Janus Henderson Investors, “The Summary of Economic Projections is markedly hawkish, with only two projected rate cuts for 2025, signaling deeper concerns over persistent or re-igniting inflation.”
Rate Cuts on the Horizon, But at a Slower Pace
The Fed’s new estimates on rate forecasts, also known as the “dot plot,” indicate two quarter-point rate cuts next year. This aligns with what the futures market has been showing over the last two weeks. However, the pace of rate cuts is expected to be slower, with about 33 basis points in cuts projected for 2025, down from 49 basis points immediately after the Fed statement.
Fed Prioritizes Inflation Risks Over Unemployment
The Fed’s decision suggests that it is prioritizing inflation risks over unemployment concerns. As Siluk noted, “The Fed seems to have switched back to prioritizing inflation risks over unemployment, readying for a January skip and potentially an extended pause in 2025, if inflationary pressures persist and the economy remains robust.” This shift in focus may indicate a more cautious approach to monetary policy in the coming year.
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