Stubborn Inflation Jeopardizes Additional Interest Rate Cuts for 2025

The Federal Reserve cut interest rates by a quarter percent Wednesday, as widely expected, but set a cautious course for lower interest rates in 2025.

The Federal Open Market Committee voted to reduce the federal funds rate to a target range of 4.25% to 4.5%, marking the third rate cut since September. But the committee’s summary of economic projections predicted rates to fall by just a half percent in 2025. After its September meeting, the committee had penciled in a full percentage point reduction for next year.

Fed Chair Jerome Powell said a big reason for the committee’s pullback was the slower-than-expected progress on combatting inflation this year.

“The single biggest factor is inflation has once again underperformed relative to expectations,” Powell said at a press conference following the meeting. “I think from this point forward, it’s appropriate to move cautiously and look for progress on inflation.”

The Fed began raising interest rates in the spring of 2022 in an effort to combat soaring inflation. It left rates at a historic high for nearly a year, which has made borrowing and financing more expensive for both consumers and businesses. 

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High inflation means you pay more for everything, including food and housing. High interest rates make it harder to afford loans or credit. 

Determining monetary policy is a fragile balancing act that requires considering inflation and the labor market. One risk the Fed faced by keeping interest rates high is slowing down the economy too much, as evidenced by rising unemployment. 

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Since September, inflation rates have ticked up slightly and further from the central bank’s 2% goal. If the economy reheats, especially given the potential inflationary pressures of the next administration’s economic policies, the Fed may try to apply the brakes by further reducing the number of rate cuts next year, or even potentially raising rates again.