Fed Cuts Rates But Signals Caution as Trump Uncertainty Looms

The Federal Reserve cut interest rates on Wednesday, as widely expected, but Chair Jerome Powell indicated that further reductions in borrowing costs will be more cautious going forward, signaling a new era of uncertainty under the incoming Trump administration, reports Reuters.

Powell's emphasis on a more measured approach to future rate cuts, delivered in a press conference following the Federal Open Market Committee's meeting, jolted Wall Street. Stock prices fell and bond yields rose, leading investors to revise down their expectations for how far rates will be cut in the coming year.

"I think we're in a good place, but I think from here it's a new phase and we're going to be cautious about further cuts," Powell stated.

Powell acknowledged that inflation has indeed moderated since its peak in 2022, but highlighted the recent "sideways" movement in price pressures, particularly in shelter costs, which have risen more slowly than anticipated. While expressing confidence in the continued easing of price pressures, he also acknowledged that the Fed is beginning to assess the potential impact of President-elect Donald Trump's policies on the economic outlook.

"Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecasts at this meeting," Powell said, referring to the Fed's updated projections that now anticipate a higher inflation trajectory and fewer rate cuts in 2025.

The Fed's new projections show officials expect the core Personal Consumption Expenditures (PCE) price index, excluding food and energy costs, to remain at 2.5% through 2025. This represents an improvement from this year's 2.8% but significantly higher than the Fed's 2% target.

"Uncertainty and upside risks to core PCE inflation both up sharply since September. This seems to largely reflect new government policies' potential impact," observed Karim Basta, chief economist with III Capital Management, to Reuters.

The Fed, having aggressively raised rates in 2022 and 2023 to combat high inflation, began its easing cycle in September. This week's meeting was widely anticipated to deliver a "hawkish" rate cut, with estimates suggesting roughly half the policy easing in 2025 compared to the 100 basis points projected three months ago. However, by the end of Powell's remarks, market pricing reflected only one 25-basis-point cut for next year.

The altered outlook highlights potential challenges for Trump in fulfilling key campaign promises. Tighter Fed policy is likely to keep consumer interest rates, such as those on home mortgages, higher, while slower inflation progress undermines Trump's pledge to lower prices.

Powell even described the decision to lower the policy rate to the 4.25%-4.50% range as a "closer call" than implied by financial markets, which had considered the cut virtually certain. The decision drew a dissent from Cleveland Fed President Beth Hammack, who joined the central bank earlier this year and indicated a preference for leaving rates unchanged.

Despite this, Powell asserted that the baseline outlook for the economy remains positive, with continued growth, low unemployment, and a gradual decline in inflation.

Future rate cuts will be contingent on further progress in reducing inflation, "with the extent and timing of additional adjustments to the target range" depending on "incoming data, the evolving outlook, and the balance of risks," the Fed stated in its post-meeting announcement. This suggests a potential pause in rate cuts at the next meeting in late January. 2025.

U.S. central bankers now project only two quarter-percentage-point rate reductions by the end of 2025. This represents a half-percentage-point reduction in policy easing compared to officials' September projections, with the Fed's inflation forecasts for the first year of the Trump administration rising from 2.1% to 2.5% in the latest projections.

Slower progress in returning inflation to the 2% target, which is not expected until 2027, translates into a slower pace of rate cuts and a slightly higher "terminal" rate of 3.1%, also to be reached in 2027, compared to the 2.9% rate previously anticipated in September.

While acknowledging that it is too early to assess the precise impact of Trump's policies, Powell indicated that the Fed is already evaluating various scenarios.

"It's very premature to try to make any kind of conclusion. We don't know what will be tariffed, from what countries, for how long and what size. We don't know whether there will be retaliatory tariffs," Powell stated. "What the Committee is doing now is discussing pathways and understanding the ways in which tariffs can affect inflation."