Stock markets tumble as the Fed cuts rates and signals cautious steps ahead for 2025 policies
The Federal Reserve reduced its key interest rate by a quarter-point on Wednesday, marking its third cut this year.
According to BNN Bloomberg, the central bank indicated a slower pace of rate reductions in 2025 due to persistently high inflation.
The Fed’s policymakers now project just two rate cuts in 2025, a reduction from September's estimate of four. This suggests consumers may not experience significantly lower borrowing costs for mortgages, auto loans, and credit cards next year.
The benchmark rate, following this latest cut, stands at 4.3 percent.
The announcement triggered a sharp market reaction, with the Dow Jones Industrial Average falling by over 1,100 points, or 2.5 percent.
The Nasdaq composite experienced a steeper decline of 3.5 percent. Higher interest rates can dampen business expansion, contributing to market unease.
At a press conference, Chair Jerome Powell stated that policymakers are adjusting their pace of rate cuts as they approach what is considered the “neutral” level, which neither spurs nor slows economic activity.
Powell described the slower pace as a reflection of elevated inflation and the proximity to this neutral rate.
Powell explained, “We’re closer to the neutral rate, which is another reason to be cautious about further moves.”
He likened the approach to navigating uncertainty, saying, “It’s not unlike driving on a foggy night or walking into a dark room with furniture. Just slow down.”
Some policymakers were divided on the decision, with four officials favouring no rate change. Cleveland Fed President Beth Hammack was the sole vote against the rate cut.
Blerina Uruci, chief economist at T. Rowe Price, described Powell’s tone as “hawkish,” favouring higher rates.
The Fed’s revised projections underscore ongoing challenges. Inflation remains above the 2 percent target, with October's annual core inflation measured at 2.8 percent.
Powell acknowledged progress in bringing inflation down but emphasized the need for caution.
Projections anticipate inflation declining to 2.5 percent by the end of 2025, while the unemployment rate, currently at 4.2 percent, has risen nearly one percentage point over the past two years.
The central bank faces uncertainty stemming from President-elect Donald Trump’s economic policies, including potential tariffs and mass deportations, which could affect inflation. Powell noted that policymakers are assessing these potential impacts.
Despite progress in cooling inflation, the Fed remains cautious about reducing borrowing costs further.
Powell reiterated, “From here, it’s a new phase, and we’re going to be cautious about new cuts.”
