Fed cuts rates by 25 basis points but anticipates slower pace next year

The Federal Reserve cut US interest rates by 25 basis points on Wednesday, but anticipates it will issue fewer cuts next year as central bank officials indicate progress in taming inflation has stalled.

The announcement lowers the Fed's benchmark target range to between 4.25 and 4.50 per cent, a full percentage point lower than when it began cutting rates in September. The Central Bank of the UAE will follow the US central bank's decision because of the currency peg.

Central bank officials' meeting this week came as recent economic data showed inflation is moving sideways, rather than closer to the Fed's 2 per cent target. The Fed anticipates its preferred metric will end the year at 2.4 per cent, slightly higher than its projections in September.

"Today was a closer call but we decided it was the right call," Fed chairman Jerome Powell told reporters.

New projections released by the Fed show the central bank anticipates two quarter-point cuts next year, which would lower the target rate to 3.9 per cent by the end of 2025. The projections are 50 basis points higher than what the Fed estimated in September, at 3.4 per cent.

"I think that the slower pace of cuts for next year really reflects both the higher inflation rate that we have this year and the expectation that inflation will be higher," Mr Powell said. He added that the higher interest rate forecasts are consistent with "firmer inflation projections".

US stocks plummeted as the projections and Mr Powell's remarks raised concerns that it could be months before the Fed cuts rates again.

The Dow Jones Industrial Average fell by 1,123.03 points, or 2.58 per cent, to 42,326.87. It market the index's 10th straight losing day.

The S&P 500 fell 2.95 per cent, while the Nasdaq Composite tumbled 3.56 per cent.

Markets also expect the Fed will move at a slower pace. Traders do not anticipate another rate cut again until June, data from the CME Group showed.

"Although the Committee eased policy today, we would characterize the decision as a 'hawkish' rate cut," Wells Fargo chief economist Jay Bryson wrote to clients.

Driving much of the uncertainty on the Fed's path of interest rate cuts is a series of stronger-than-expected economic data.

The Fed's preferred inflation metric has been moving sideways in recent months. The Personal Consumption Expenditures Price Index rose by 2.3 per cent on an annual basis last month, up from 2.1 per cent the month before. Core PCE, which strips out food and energy prices, also rose from 2.7 per cent to 2.8 per cent year on year.

This month, Fed governor Christopher Waller acknowledged that inflation “may be getting stuck above” the central bank's long-term 2 per cent target, although he was still leaning towards a rate cut.

Inflationary concerns were reflected in the Fed's updated projections. The latest projections show the Fed does not anticipate inflation to return to its 2 per cent target until 2027.

The Fed anticipates PCE inflation will fall to 2.4 per cent this year before increasing to 2.5 per cent in 2025. Core PCE is projected to dip to 2.8 per cent in 2024 before falling to 2.5 per cent the following year.

Job growth also bounced back in November with 227,000 gains, after a Boeing strike and extreme weather weighed on the previous month. Meanwhile, the unemployment rate edged up slightly from 4.1 to 4.2 per cent.

Further complicating the Fed's next steps is the incoming presidency of Donald Trump, who will be sworn in on January 20. Economists generally agree that his policies of mass deportation and universal tariffs are inflationary.

Mr Powell said it is too soon to understand how any tariff-based policy would affect the economic outlook, noting officials do not know what kinds of tariffs will be implemented or if there will be retaliatory tariffs.

"This is not a question that's in front of us right now," he said.