The US Federal Reserve cut interest rates by 25 basis points as expected, and still projects one more rate cut next year, while initiating the Reserve Requirement Fund (RMP) to purchase $40 billion in short-term bonds. However, this revealed the biggest division among policymakers in six years, suggesting a slower pace of action next year and a possible halt to action in the near future. As anticipated by Wall Street, the Fed also initiated reserve management, deciding to purchase short-term Treasury bonds at the end of the year to address pressures in the money market.
On Wednesday, December 10th, Eastern Time, the Federal Reserve announced after its FOMC meeting that it had lowered the target range for the federal funds rate from 3.75% to 4.00% to 3.50% to 3.75%. This is the third rate cut of 25 basis points this year. Notably, this was the first time since 2019 that the Fed's interest rate decision was rejected by all three votes.
The dot plot released after the meeting showed that the Federal Reserve's interest rate path forecast remained consistent with the dot plot released three months ago, still anticipating a 25 basis point rate cut next year. This means that the pace of rate cuts next year will be significantly slower than this year.
By Tuesday's close, CME Group tools showed that the futures market expected an 88% probability of a 25 basis point rate cut this week, while the probability of a further 25 basis point cut would only reach 71% by June next year. The probability of such a cut at the three meetings in January, March, and April next year was less than 50%.
The predictions reflected in the CME tool can be summarized by the recently hotly debated term "hawkish rate cut." This means that the Federal Reserve will cut rates this time, but simultaneously hints at a possible pause in further action, with no further rate cuts expected in the near future.
Nick Timiraos, a veteran Federal Reserve reporter known as the "new Fed news agency," wrote in a post-meeting article that the Fed "hinted that it may not cut interest rates anytime soon" because there was an "unusual" internal disagreement about whether inflation or the job market was more worrying.
Timiraos pointed out that three officials disagreed with the 25 basis point rate cut at this meeting, and the stalled downward trend in inflation and the cooling job market made this meeting the most divided in recent years.
In the post-meeting press conference, Powell emphasized that he does not believe "the next rate hike" is anyone's basic assumption. Current interest rates allow the Fed to patiently wait and see how the economy evolves. He also stated that currently available data indicates the economic outlook has not changed, and the scale of Treasury bond purchases is likely to remain at a high level in the coming months.
Many had previously predicted that the dot plot, reflecting future interest rate changes, would show Federal Reserve officials to be more hawkish. However, this dot plot did not show that tendency; in fact, it leaned more dovish than the previous one.
Of the 19 Federal Reserve officials who provided forecasts, seven this time expect interest rates to be between 3.5% and 4.0% next year, compared to eight who did so last time. This means that one fewer person expects no rate cut next year compared to last time .
The economic outlook released after the meeting showed that Federal Reserve officials raised their GDP growth forecasts for this year and the following three years, while slightly lowering their unemployment rate forecast for 2027 by 0.1 percentage points. Unemployment rate forecasts for the remaining years remained unchanged. This adjustment indicates that the Federal Reserve believes the labor market is more resilient.
Meanwhile, Federal Reserve officials slightly lowered their PCE inflation and core PCE inflation forecasts by 0.1 percentage points each for this year and next. This reflects a slight increase in the Fed's confidence that inflation will slow in the near future.
Powell: We can wait patiently at the current interest rate level.
With today's rate cut, the Federal Reserve has cumulatively lowered policy rates by 75 basis points in the past three meetings. Powell stated that this will help push inflation gradually back down to 2% after the impact of tariffs subsides.
He said that the policy stance adjustments made since September have brought the policy rate into a range of “neutral rate” estimates. The median forecast from Federal Open Market Committee members shows that the appropriate level for the federal funds rate is 3.4% at the end of 2026 and 3.1% at the end of 2027, unchanged from September.
Powell stated that the current risks to inflation are tilted to the upside, while the risks to employment are tilted to the downside, presenting a challenging situation.
A reasonable basic assessment is that the impact of tariffs on inflation will be relatively short-lived, essentially a one-off price increase. Our mandate is to ensure that this one-off price rise does not escalate into persistent inflation. However, at the same time, downside risks to employment have increased in recent months, and the overall risk balance has shifted. Our policy framework requires a balance between the two aspects of our dual mandate. Therefore, we believe a 25 basis point cut in the policy rate at this meeting is appropriate.
With the decline in inflation stalled, Federal Reserve officials had hinted ahead of this week's decision that further rate cuts might require evidence of a weakening labor market. Powell stated at a press conference:
"Our current position allows us to patiently wait and observe how the economy will evolve next."
During the Q&A session, when asked whether the next adjustment would necessarily be downward, given that the current policy interest rate is closer to the neutral level, or whether policy risks have become truly two-way, Powell responded that no one is currently using a rate hike as a basic assumption, and he had not heard of such a view. Currently, there are differing opinions within the committee: some members believe the current policy stance is appropriate and advocate maintaining the status quo and further observation; while others believe that further rate cuts, or even more than once, may be necessary this year or next.
When the committee members wrote down their assessments of the policy path and appropriate interest rate levels, the expectations mainly focused on a few scenarios: either maintaining the current level, implementing a small rate cut, or a slightly larger rate cut. Powell emphasized that the current mainstream expectations did not include a scenario of interest rate hikes.
Powell stated that, as a separate decision, the Federal Reserve also decided to initiate the purchase of short-term U.S. Treasury securities, with the sole purpose of maintaining an ample supply of reserves over a longer period , thereby ensuring that the Fed can effectively control policy rates. He emphasized that these issues are separate from the monetary policy stance itself and do not represent a change in policy orientation.
He stated that the scale of short-term U.S. Treasury purchases is likely to remain at a high level in the coming months, and the Federal Reserve is not strictly "concerned" about the tightness in the money market, but this situation has just come a little faster than expected.
Powell also stated that, according to the statement released by the New York Federal Reserve, the initial asset purchases will reach $40 billion in the first month and are likely to remain at a high level in the following months to alleviate anticipated short-term money market pressures. Afterwards, the purchases are expected to decrease, with the pace depending on market conditions.
Regarding the labor market , Powell stated that although official employment data for October and November have not yet been released, existing evidence suggests that layoffs and hiring activity remain at low levels. Meanwhile, household perceptions of job opportunities and businesses' perceptions of difficulty in recruiting are both continuing to decline. The unemployment rate continued to rise slightly to 4.4%, while job growth slowed significantly compared to earlier this year. The Federal Reserve also stopped using the phrase "the unemployment rate remains low" in its statement.
In the ensuing Q&A session, Powell stated that after adjustments to the overestimation in the employment data, job growth may have turned slightly negative since April.
