Economic Watch: U.S. Fed slashes rates, fewer cuts expected next year

by Matthew Rusling, Xiong Maoling

WASHINGTON, Dec. 19 (Xinhua) -- The U.S. Federal Reserve cut interest rates a quarter point on Wednesday in a widely-anticipated move. However, the central bank indicated there would be fewer cuts next year, as it braces for uncertainty stemming from the incoming Donald Trump administration's policies.

The Federal Open Market Committee, the central bank's policy-setting body, reduced the target range for the federal funds rate by 25 basis points to 4.25 percent to 4.5 percent -- marking the third consecutive rate cut in this easing cycle.

"With today's action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive," Fed Chair Jerome Powell told reporters at a press conference. "We can therefore be more cautious as we consider further adjustments to our policy rate."

Economists had expected such a move. However, the main question remains how much and how frequently the Fed would cut rates next year.

According to the Fed's latest quarterly summary of economic projections released Wednesday, the Fed officials' median projection for the federal funds rate in 2025 is 3.9 percent, up from the 3.4 percent projection in September. This roughly translates into a median forecast of two 25-basis-point cuts next year, down from four in the September projection.

"We moved pretty quickly to get to here, and I think going forward obviously we're moving slower," Powell told reporters. "It's kind of common sense thinking that when the path is uncertain, you go a little bit slower."

The Fed's signal that it will slow the pace of interest rate cuts next year has disappointed markets and traders.

Following the news, the Dow Jones Industrial Average sank more than 1,100 points, dropping 2.58 percent for the day. The Nasdaq Composite fell 3.56 percent.

The news comes as inflation -- the worst in decades, especially food and rent inflation -- remains above the Fed's long-term target of 2 percent, with high prices continuing to inflict pain on American families. While economists project strong growth next year, analysts also predict inflation could increase as well.

According to the summary of economic projections, the median projection for personal consumption expenditures (PCE) inflation among Fed officials is 2.4 percent by year-end, up from 2.3 percent in the September projection. The median projection for PCE inflation in 2025 is 2.5 percent, up from 2.1 percent in the September projection.

Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, told Xinhua, "By the end of 2025, I expect the policy rate to be cut to 3.75 percent in small decrements."

Dean Baker, a senior economist at the Center for Economic and Policy Research, told Xinhua that he expects the Fed to be "very cautious" over rate cuts next year.

"The economy seems to be somewhat stronger than they had expected. This means there is less need to have rate cuts to sustain growth, although there are some signs of weakening in the household data," he said.

When asked whether cuts in 2025 be significant or smaller, Baker said: "I would be surprised if we see big cuts in 2025, but they will respond to policy and data. If Trump goes through with tariffs and mass deportation, that will be inflationary and likely to cause the Fed to put rate cuts on hold."

President-elect Donald Trump said he plans to deport many of the immigrants who illegally crossed the border during the administration of President Joe Biden. He said he would also slap tariffs on a number of U.S. trading partners. Both measures will likely increase prices for U.S. consumers, according to economists.

Powell told reporters that it's still uncertain how Trump's additional tariffs would impact the inflation picture.

"So we just don't know, really, very much at all about the actual policies. So it's very premature to try to make any kind of conclusion," said Powell.

Baker, meanwhile, was concerned about the stock market's current situation.

"The stock market is at near record highs at a time when most forecasts project little profit growth in the years ahead. This is a recipe for a plunge, but who knows?" Baker said. "But if we do see a big stock dip and it slows growth -- likely story -- then the Fed would be more likely to cut rates." ■