Fed delivers a hawkish rate cut

Fed cut rates by 25 basis points...

At its meeting today, the Federal Reserve decided to cut interest rates by a further 25 basis points, bringing the target range for the federal funds rate down to 4.25% - 4.50%. With this third interest rate cut in a row, the Fed has reduced the key interest rate by a total of 100 basis points. Beth Hammack, President of the Cleveland Fed, voted against the cut. Greater dissatisfaction with the decision was evident among the seven non-voting members, of whom as many as three preferred unchanged rates (according to the updated dot plot published today).

The statement released after the meeting contained an interesting adjustment: the decision on the “extent and timing” of further adjustments would take into account the data, the evolving outlook and the balance ofd risks. Previously, the Fed had only talked about further adjustments. This suggests that the Fed is no longer likely to cut key rates at every future meeting.

... and indicates only two more cuts for next year

The updated projections of the meeting participants suggest that only 50 basis points of further interest rate cuts are still on the cards for 2025. According to the dot plot, the meeting participants' assessment of the appropriate interest rate path, the average key interest rate at the end of next year is expected to be 3.9%. In September, the assumption was 3.4% (the dot plot shows the mid-point of the target range rounded to one decimal place, see chart). Thus, the Fed has taken two of the four rate cuts previously projected for 2025 off the table.

The biggest change in the projections concerns inflation: the meeting participants expect only a slight decline in inflation next year: After 2.8% in Q4.2024, inflation is expected to rise to 2.5% (September projection: 2.1%). The core rate should then also be 2.5% (previously: 2.2%). Inflation is not expected to reach the target of 2% until 2027 (previously: 2026).

For full text see attached PDF-Version.