In a widely anticipated move, the Federal Reserve on Wednesday lowered its benchmark interest rate by 25 basis points (bps), bringing the target range to 4.25% to 4.5%.
This marks the third consecutive reduction by the Fed following a 50-bps cut in September and a 25-bps cut in November, cumulatively reducing rates by 100 bps this year. Going forward, however, a slower path for rate cuts is expected when compared to previous forecasts from Fed policymakers.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Federal Open Market Committee (FOMC) said in a statement. “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2% objective but remains somewhat elevated.
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.“
Recent inflation data showed prices rising by 2.7% year over year in November, up slightly from 2.6% in October. Core inflation, which excludes volatile food and energy costs, climbed by 3.3% last month. Meanwhile, the labor market showed resilience, adding 227,000 nonfarm payroll jobs in November, well above the 12-month average of 186,000 jobs per month.
Chris Stanley, senior director and banking industry practice lead for Moody’s, said that the November Consumer Price Index (CPI) underscores the “long and variable lags” that influence Fed policy. Components such as rent, auto insurance and services, which adjust slowly, continue to influence inflation trends.
“Persistent inflation transforms interest rate risks into credit risks over time,” Stanley said in a statement. “The latest inflation figures signal trouble for the long-term yield curve, particularly affecting CRE [commercial real estate] borrowers close to maturity and dampening mortgage origination activity.”
The Fed decision was expected by market participants. The CME Group‘s FedWatch tool showed that roughly 98% of interest rate traders predicted the 25-basis-point cut, while a small sliver expected rates to remain unchanged. But some economists questioned the wisdom of the move given the uptick in both headline and core inflation.
For Ermengarde Jabir, director of economic research at Moody’s, the cut might not be the “most prudent” move in light of recent inflation headline and core upticks. She also mentioned stress on commercial real estate, nuanced changes in discretionary spending — such as self-storage units — and a widening in capitalization rate spreads, which comes “at a time when a myriad of geopolitical tensions continues to fan the embers of inflation.”
“While it’s key not to hinge long-term strategy on short-term data fluctuations, the trajectory of recent cuts, starting with September’s 50-bps cut, may be risky and aren’t reflective of macroeconomic conditions such as low unemployment and strong GDP growth,” Jabir said in a statement.
The FOMC also released its projections for 2025, with minor revisions to the real gross domestic product growth rate (2.1%, compared to 2% in September) and unemployment rate (4.3%, compared to 4.4%).
But the forecast for PCE inflation went from 2.1% in September to 2.5% in December. Core inflation rose from 2.2% to 2.5%. As a consequence, the appropriate policy path for the federal funds rate is to end 2025 at 3.9%, compared to 3.4% in September. This means cutting rates by 50 bps in 2025, less than the expected 100 bps in September.
Fed Chair Jerome Powell told journalists on Wednesday that the labor market is not a source of significant inflationary pressure and does not need further cooling to get inflation back to 2%. But there’s still uncertainty surrounding inflation.
“It’s common sense thinking that when the path is uncertain, you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture,” Powell said. “The story of why inflation should be coming down is still intact. We and most other forecasters still feel we are on track to get [inflation] down to 2%. It might take another year or two from here.”
He added that as the policy stance is now “significantly less restrictive,” officials can be more careful when considering further adjustments. Powell said the Fed is not “on any preset course” and “the outlook is pretty bright for our economy.”
Looking ahead, economists at Rithm Capital noted in a market update that while uncertainties around trade and immigration policies persist, surveys of executives and small-business owners point to improved hiring expectations and elevated pricing forecasts.
“It seems probable that the pace of rate cuts will slow in the coming months. Indeed, unless inflation resumes its move toward the Fed’s 2% target or there is a marked increase in downside labor market risks, the Fed may be getting close to the end of its rate cutting cycle.”
In the housing space, HousingWire’s Mortgage Rates Center on Tuesday showed the 30-year fixed-rate conforming loan average at 6.85%, down 2 bps from a week ago. The 15-year conforming fixed rate averaged 7.02%, up 1 bps during the week.
“A more cautious approach of Fed monetary easing will keep borrowing costs higher for longer across the economy. This includes mortgage rates, which are benchmarked to the 10-year Treasury yields and are expected to fall to the mid-to-low 6% range by the end of next year,” First American senior economist Sam Williamson said in a statement.
“While a drop in mortgage rates could potentially revitalize the housing market, the Fed’s gradual approach to easing means many homeowners will likely remain locked into their favorable rates, prolonging the market’s stagnation,” he added.
Eric Orenstein, senior director at Fitch Ratings, said in a statement that “inflation risks have kept treasury yields higher even with the Fed’s third consecutive rate cut, though mortgage originators will benefit from higher volumes in 2025 with nearly $2 trillion of outstanding mortgages above 6%.”
