US Fed has reduced its key interest rates by 0.25%. The United States Federal Reserve has declared its eighth and final monetary policy decision for 2024 following a two-day meeting of the Federal Open Market Committee (FOMC). The Fed has reduced its benchmark interest rate by 25 basis points, or a quarter of a percentage point, bringing it to a range of 4.25% to 4.50%. Under the leadership of Chair Jerome Powell, the rate-setting committee has now lowered the federal funds rate for the third consecutive meeting, having initiated its policy easing cycle in September, marking the first such action in four years.
The Federal Reserve now anticipates only two quarter-percentage-point rate cuts by the conclusion of 2025, a decrease from their previous estimate of four reductions made in September. In its policy statement, the FOMC noted, “In considering the extent and timing of additional adjustments to the target range, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
US Federal Reserve Policy December 2024: Below are 5 essential highlights.
1. The US Federal Reserve has reduced its key interest rates by 25 basis points in its final policy assessment for 2024.
Policymakers voted 11 to 1 in favor of lowering the central bank’s primary lending rate to a range of 4.25 to 4.50 percent. Cleveland Fed President Beth Hammack, who joined the institution earlier this year, was the sole dissenter, expressing her preference to keep rates unchanged during this meeting. “With today’s decision, we have decreased our policy rate by a full percentage point from its peak, resulting in a significantly less restrictive policy stance,” stated US Fed Chair Jerome Powell.
“Consequently, we can adopt a more cautious approach as we evaluate potential further adjustments to our policy rate,” he added. Powell noted that current rates continue to exert a ‘meaningful’ restraint on economic activity and emphasized that the Fed is ‘on track to cut.’ However, he indicated that officials would need to observe more progress regarding inflation before considering any additional reductions. The US central bank had maintained the key borrowing rate at a 23-year high for 14 consecutive months since July 2023 in an effort to address the most severe inflation crisis in nearly four decades.
2. The US Federal Reserve has adjusted its outlook for interest rate reductions in 2025, indicating a more cautious approach to easing monetary policy in light of persistent inflationary pressures.
Recent quarterly forecasts reveal that several officials within the Fed have revised their expectations, anticipating fewer rate cuts than previously estimated just a few months prior.
The median forecast now suggests that Fed policymakers expect the benchmark interest rate to average between 3.75 percent and 4 percent by the end of 2025, which translates to only two quarter-percentage-point reductions—significantly lower than the projections made in September. Only five officials expressed a desire for a more aggressive approach to rate cuts in the upcoming year.
3. The U.S. Federal Reserve has revised its projections for inflation and GDP for the year 2025.
US Federal Reserve policymakers have revised their forecast for headline US inflation for the upcoming year to 2.5 percent, indicating that they do not anticipate a return to the 2 percent level until 2027. In a favorable development for the largest economy globally, members of the Federal Open Market Committee (FOMC) have also increased their growth projections for this year to 2.5 percent, with an expectation of 2.1 percent growth in 2025.
Powell indicated that the Federal Reserve’s most recent forecasts project core inflation to decrease to 2.5 percent in the coming year, which he described as a notable advancement. He stated, “Achieving that level would represent significant progress in reducing inflation. Both we and the majority of other analysts believe we remain on course to attain a two percent target, although it may require an additional year or two to accomplish.”
Policymakers anticipate that the unemployment rate will be slightly lower this year than earlier estimates, at 4.2 percent, before experiencing a minor increase to 4.3 percent in 2025 and 2026. One analyst has suggested that this projection may be overly optimistic. Over the past two years, the unemployment rate has risen by nearly one full percentage point. Concerns regarding the increasing unemployment rate played a role in the Federal Reserve’s decision to lower its key interest rate by 50 basis points in September.
4. The US Fed has made adjustments to the rate on its reverse repurchase agreement (RRP) tool and has reduced the speed of its balance sheet reduction.
The US Federal Reserve has not only implemented a primary interest rate reduction but has also decreased the rate on a facility utilized to manage its benchmark, with the objective of ensuring the smooth operation of US funding markets. Specifically, the rate on the overnight reverse repurchase agreement facility was lowered by five basis points in relation to the lower bound of the target range.
In conjunction with the Fed’s adjustment of the overall target range for the federal funds rate to between 4.25 percent and 4.50 percent, the revised RRP rate now stands at 4.25 percent, aligning with the lower bound for the first time since 2021. This facility is intended to establish a floor for the Fed’s target for the federal funds rate by absorbing excess cash from outside the banking system.
This action may be aimed at preventing potential tightness in money market rates and could facilitate further reductions in the Fed’s balance sheet by encouraging additional funds to flow into bank reserves. Additionally, the US Fed has announced a 30 basis point reduction in the rate it offers to lenders utilizing its overnight reverse repurchase facility.
In its policy statement, the US Fed indicated, “The Committee will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities.” The Fed had previously disclosed plans to slow the pace of its balance sheet reduction starting June 1, allowing for a monthly runoff of $25 billion in Treasury bonds, down from $60 billion.
5. Wall Street experiences a significant decline due to expectations of interest rate cuts; the S&P 500 records its most substantial loss on a Federal Reserve day since 2001, while the Dow Jones Industrial Average endures its longest losing streak since 1974.
The US Federal Reserve unsettled the US stock markets on Wednesday, resulting in a decline for most stocks and a significant increase in US Treasury yields following its prediction of fewer interest rate reductions in the upcoming year. As reported by Bloomberg, this marked the most substantial loss for the S&P 500 on a rate decision day since 2001.
The S&P 500 fell below the 6,000 threshold, experiencing its most challenging session since August. The Nasdaq 100, which is heavily weighted towards technology, decreased by 3.6 percent, the largest drop in five months. For the Dow, this represented its tenth consecutive daily loss, the longest losing streak since 1974, along with its most significant daily percentage drop since early August.
