US Federal Reserve Cuts Interest Rate by 25 Basis Points: A Key Policy Decision
US Fed Slashes Interest Rates: What This Means for Your Wallet
The Federal Open Market Committee (FOMC), led by Chairman Jerome Powell, reduced the federal funds rate by 25 basis points (bps) to a target range of 4.25-4.50%.
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1. US Fed Slashes Key Interest Rates by 25 Basis Points
In a vote of 11-to-1, the FOMC approved the third consecutive rate cut of the year, signaling that the Fed is nearing the end of its current easing cycle. The rate reduction reflects the central bank's efforts to adjust its policy stance amid slower inflation growth. Cleveland Fed President Beth Hammack was the sole dissenter, advocating for a more cautious approach with no change to the current rate.
2. US Fed Signals Slower Pace of Rate Cuts in 2025
Looking ahead, the US Federal Reserve has tempered its rate-cut projections for 2025, indicating a more cautious approach to easing. The Fed now expects only two quarter-point rate reductions in 2025, down from previous forecasts that anticipated a more aggressive pace of cuts.
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3. Inflation and GDP Outlook: Fed Raises Forecasts for 2025
The Fed has revised its inflation and GDP growth forecasts for 2025, signaling both cautious optimism and recognition of persistent inflationary pressures. The latest projections indicate that headline inflation will reach 2.5% in 2025, with core inflation remaining slightly elevated, at around 2.5%.
4. Fed Adjusts RRP Facility Rate to Control Funding Markets
As part of its policy adjustments, the Fed also made changes to its overnight reverse repurchase agreement (RRP) rate, lowering it by 5 basis points. The RRP facility is used to help manage short-term interest rates and maintain smooth functioning of money markets. By reducing the rate on this facility, the Fed aims to stabilize funding markets and manage liquidity effectively, while also supporting the broader objectives of its monetary policy.
5. Market Reaction: Wall Street Reacts to Fed’s Policy Outlook
Following the Fed's decision, financial markets experienced significant volatility. The outlook for fewer rate cuts in 2025 sent shockwaves through Wall Street, with the S&P 500 logging its worst session on a rate decision day since 2001. The tech-heavy Nasdaq 100 suffered a 3.6% decline, while the Dow Jones Industrial Average faced its longest losing streak since 1974.
Conclusion: Fed’s Cautious Approach Amid Mixed Economic Signals
The US Federal Reserve's decision to cut interest rates by 25 bps in December 2024 marks a critical juncture in its monetary policy. While inflation has eased, it remains above the Fed's long-term target, prompting the central bank to adopt a more measured approach moving forward. The market's response underscores the tension between inflation management and growth prospects, with the Fed's cautious outlook for 2025 signaling that the easing cycle may not proceed as quickly as initially expected.
As we approach 2025, all eyes will be on the Fed's next moves, especially in light of evolving economic data and the broader global economic environment.
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