The Federal Reserve cut interest rates by a quarter percent Wednesday (PDF), as widely expected, but set a cautious course for lower interest rates in 2025.
The Federal Open Market Committee voted to reduce the federal funds rate to a target range of 4.25% to 4.5%, marking the third rate cut since September. But citing in its press release that "the economic outlook is uncertain," the committee's summary of economic projections predicted rates to fall by just a half percent in 2025. In its September predictions, the committee penciled in a full percentage point.
The Fed began raising interest rates in the spring of 2022 in an effort to combat soaring inflation. It left rates at a historic high for nearly a year, which has made borrowing and financing more expensive for both consumers and businesses.
High inflation means you pay more for everything, including food and housing. High interest rates make it harder to afford loans or credit.
Determining monetary policy is a fragile balancing act that requires considering inflation and the labor market. One risk the Fed faced by keeping interest rates high is slowing down the economy too much, as evidenced by rising unemployment.
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Since September, inflation rates have ticked up slightly and further from the central bank's 2% goal. If the economy reheats, especially given the potential inflationary pressures of the next administration's economic policies, the Fed may try to apply the brakes by further reducing the number of rate cuts next year, or even potentially raising rates again.
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