Fed lowers rates but signals cautious future adjustments

The Federal Reserve cut its key interest rate by 0.25%, lowering it to a 4.25 to 4.5% range. It is the third consecutive reduction, bringing rates back to December 2022 levels. 

The S&P 500 and Nasdaq lost 3% and 3.6%, respectively. The U.S. dollar surged to a two-year high.

Chair Jerome Powell described the move as “less restrictive” but warned of limited future cuts, projecting only two in 2025 and gradual decreases through 2027.

Markets react sharply 
Despite the cut, markets reacted sharply. The Dow fell over 1,100 points, Treasury yields soared and futures adjusted expectations for 2025 cuts.

Reasons behind the Fed’s recalibrations
The central bank revised its economic outlook as it is walking a tightrope between lowering rates too quickly, prompting inflation, and reducing them too slowly, which would increase unemployment.

Since inflation has remained above the Fed’s 2% target, Powell and his team have decided to be more cautious “as we consider further adjustments to our policy rate,” he said yesterday.

The Fed also needs to wait and watch how Donald Trump’s second term and the president-elect’s plans (tariffs, tax cuts and deportation) will affect inflation.

GDP growth for 2024 is now expected at 2.5%, while unemployment is projected to remain steady at 4.2%.

The committee aims to balance policy to sustain growth without risking a slowdown. Meanwhile, mortgage rates and Treasury yields remain elevated, complicating the Fed’s efforts.