The Federal Reserve lowered interest rates by 25 basis points as scheduled, with one voting member opposing, suggesting a slowdown in pace, and expects the number of rate cuts next year to be halved to two

Key Points:

The Federal Reserve has cut interest rates by 25 basis points for the second consecutive time, but this time one person unexpectedly voted against it. The President of the Cleveland Fed hopes to keep rates unchanged, indicating a fracture in the unified front within the Federal Reserve.

The Federal Reserve also lowered the overnight reverse repurchase (ON RRP) rate by 30 basis points to 4.25%, aligning it with the lower bound of the federal funds rate target range for the first time since 2021.

The statement from this meeting continues to emphasize that the risks to employment and inflation are generally balanced, and it is firmly committed to supporting full employment. The balance sheet reduction plan remains unchanged, with new considerations for the "magnitude and timing" of future rate adjustments.

The dot plot shows that Fed officials have raised their interest rate expectations for the next three years, with the median rate expectations for next year and the year after both raised by 50 basis points, anticipating two rate cuts in each of those years.

Fed officials have raised GDP and PCE inflation expectations for this year and next, while lowering unemployment rate expectations for these two years. The PCE inflation expectation for next year has been raised by 0.4 percentage points to 2.5%, and the unemployment rate expectation has been lowered by 0.1 percentage points to 4.3%.

"New Federal Reserve News Agency": There are greater uncertainties regarding the magnitude and pace of future rate cuts, and the addition of considerations for the "magnitude and timing" of rate adjustments in the statement suggests that the pace of rate cuts will slow.

As expected by the market, the Federal Reserve decided to continue cutting rates at a regular pace during this week's meeting, while also indicating that it will slow the pace of future rate cuts, with the anticipated number of rate cuts next year halved from the previous expectation.

On Wednesday, December 18th, Eastern Time, the Federal Reserve announced after the Federal Open Market Committee (FOMC) meeting that the target range for the federal funds rate was lowered from 4.5% to 4.75% to 4.25% to 4.5%, marking the second consecutive meeting with a 25 basis point rate cut. Thus, the Federal Reserve has cut rates for the third consecutive meeting, having raised rates by a cumulative 525 basis points from March 2022 to July last year, and now has cut rates by a total of 100 basis points in three meetings.

The actions and magnitude of the Federal Reserve's continued rate cuts align with Wall Street's expectations. By the close on Tuesday, the CME's tools indicated that the futures market expected a slightly over 97% probability of a 25 basis point rate cut by the Federal Reserve this week, up from less than 89% a week ago. Veteran Federal Reserve reporter Nick Timiraos, known as the "New Federal Reserve News Agency," recently indicated that this week's rate cut was a foregone conclusion and mentioned the possibility of pausing rate cuts next year.

In addition to continuing to lower the policy interest rate for the federal funds rate, the Federal Reserve also reduced the rate of the overnight reverse repurchase (ON RRP) tool by 30 basis points, from 4.5% to 4.25%, marking the first time since 2021 that this key reverse repurchase tool's rate aligns with the lower bound of the federal funds rate target range. The minutes from the last FOMC meeting in November showed that Fed policymakers discussed lowering the ON RRP rate at that time, with some believing it should be lowered at the "next meeting" to make it the lower bound of the federal funds rate This time, the Federal Reserve raised its inflation and interest rate expectations for the next two years, reflecting a hawkish tendency. Some commentators noted that the Fed's adjustment of inflation and unemployment expectations for next year indicates that the Fed believes Trump's policies after taking office next year will drive up inflation.

After announcing the interest rate cut, Timiraos pointed out that after a cumulative cut of 100 basis points since September this year, Fed officials now expect that if economic growth remains stable and inflation continues to slow, there will only be two rate cuts next year, a reduction from the previously hinted four times. The first sentence of the article stated that the Fed agreed to cut rates by 25 basis points this Wednesday, but “there are greater uncertainties regarding the magnitude and pace of future rate cuts.”

Unexpected dissent from a voting member against the rate cut, breaking the Fed's internal united front

Surprisingly, although the rate cut was exactly the same as the last one and was a routine action, this time there was a Fed decision-maker who voted against continuing the rate cut. This was one of the two major changes in the Fed's statement compared to the last statement.

The resolution statement showed that the decision to cut rates by 25 basis points did not receive unanimous support from all FOMC voting members, and similar to the previous rate cut decision in September, there was also one voting member who opposed this time. This marks the second time since the start of this rate cut cycle in September that the Fed's decision did not receive full support from decision-makers.

According to the resolution statement, the dissenter was Cleveland Fed President Beth M. Hammack, who preferred to keep rates unchanged, advocating for a pause in rate cuts.

Analysis suggests that the unexpected dissent from an official at this meeting has caused a crack in the Fed's internal united front.

The day before the Fed announced the rate cut, Timiraos published an article revealing the internal divisions within the Fed. His article stated that this week's rate cut might end the first phase of the rate cut cycle, as doubts within the Fed have intensified, with some officials wanting to see more concrete evidence of improving inflation or worsening labor market conditions before continuing to cut rates.

New considerations for the "magnitude and timing" of future rate adjustments

Compared to the last FOMC resolution statement in November, another major change in this Fed statement is the addition of "magnitude" and "timing" when mentioning considerations for future rate adjustments. The last statement in November stated: “When considering new adjustments to the target range for the federal funds rate, the committee will carefully assess future data, evolving outlooks, and risk balances.” This statement has been revised to:

“When considering the magnitude and timing of new adjustments to the target range for the federal funds rate, the (FOMC) committee will carefully assess future data, evolving outlooks, and risk balances.”

Timiraos commented that by adding "magnitude and timing" to the language regarding potential rate adjustments, the Fed implies that the pace of rate cuts will slow

The dot plot shows an upward adjustment in interest rate expectations for the next three years, with median rates raised by 50 basis points for next year and the year after

The dot plot released after this Wednesday's meeting indicates that compared to the last update in September, Federal Reserve officials have raised their interest rate expectations for 2025, as well as for next year, 2026, and 2027. In other words, the Fed's expectations for interest rate cuts over the next three years have weakened.

The chart below shows the changes in interest rate expectations among Fed officials as reflected in the dot plot, with yellow dots representing the December dot plot expectations and gray dots representing the September dot plot expectations.

The dot plot shows that among the 19 officials providing forecasts, 15 now expect next year's interest rates to be above 3.5%, with 11 expecting rates to be below 4.0% and four expecting rates to be above 4.0%. In the previous forecast, all 15 officials expected next year's rates to be below 3.5%. This time, 12 officials expect the 2026 rates to be above 3.25%, whereas only seven officials had that expectation in the last forecast.

The median value of the interest rate predictions released after the meeting shows that compared to the last outlook in September, Fed officials have raised their interest rate expectations for all time periods after this year. The median interest rate expectation for next year has risen to 3.9%, the median for 2026 has risen to 3.4%, both up by 50 basis points, and the median for 2027 has been raised by 20 basis points to 3.1%.

The specific median predictions are as follows:

The federal funds rate at the end of 2024 is 4.4%, unchanged from the September forecast.

The federal funds rate at the end of 2025 is 3.9%, up from the September forecast of 3.4%.

The federal funds rate at the end of 2026 is 3.4%, up from the September forecast of 2.9%.

The federal funds rate at the end of 2027 is 3.1%, up from the September forecast of 2.9%.

The longer-term federal funds rate is 3.0%, up from the September forecast of 2.9%.

Based on this, Fed officials currently expect two rate cuts of 25 basis points each next year, with a similar cut expected the following year. This aligns with the market pricing reflecting expectations of two rate cuts next year, which is a significant cooling from earlier market expectations of more than six cuts next year.

The median interest rate expectation for 2026 is at the highest level since records for that year began.

Upward adjustment of GDP and PCE inflation expectations for this year and next year, downward adjustment of unemployment rate expectations within two years

The economic outlook released after the meeting shows that Federal Reserve officials have raised GDP growth expectations for this year and next year, lowered unemployment rate expectations for this year and next year, and raised PCE inflation expectations and core PCE inflation expectations for this year and the next three years.

The specific forecasts are as follows:

• The expected GDP growth rate for 2024 is 2.5%, an increase of 0.5 percentage points from the September forecast of 2.0%. The expected growth rates for 2025 and 2026 are 2.1% and 2.0%, respectively, both previously forecasted at 2.0% in September. The expected growth rate for 2027 is 1.9%, down from the September forecast of 2.0%, and the longer-term expected growth rate is 1.8%, unchanged from the September forecast.
• The expected unemployment rate for 2024 is 4.2%, a decrease of 0.2 percentage points from the September forecast of 4.4%. The expected unemployment rate for 2025 is 4.3%, down 0.1 percentage points from the September forecast of 4.4%. The expectation for 2026 is 4.3%, unchanged from September, and the expectation for 2027 is 4.3%, with the longer-term unemployment rate expectation at 4.2%, all previously forecasted at 4.2% in September.
• The expected PCE inflation rate for 2024 is 2.4%, an increase of 0.1 percentage points from the September forecast of 2.3%. The expectation for 2025 is 2.5%, up 0.4 percentage points from the September forecast of 2.1%. The expectations for 2026 and 2027 are 2.1% and 2.0%, respectively, with the longer-term expectation at 2.0%, all previously forecasted at 2.0% in September.
• The expected core PCE for 2024 is 2.8%, an increase of 0.2 percentage points from the September forecast of 2.6%. The expectation for 2025 is 2.5%, up 0.3 percentage points from the September forecast of 2.2%. The expectations for 2026 and 2027 are 2.2% and 2.0%, respectively, with the September forecast also at 2.0%.

Continue to reaffirm that the risks to employment and inflation are generally balanced, and the balance sheet reduction plan remains unchanged

In addition to one dissenting vote and the new wording added regarding interest rate adjustments, this resolution statement continues to use the language from the previous statement, reaffirming that "the risks to achieving employment and inflation goals are generally balanced," and reiterating the commitment to bring inflation back to the Federal Reserve's target of 2%. It also continues to adopt the new focus on employment goals from the September statement, including stating that the FOMC is "firmly committed to supporting maximum employment" and that the FOMC "is attentive to the risks on both sides of the dual mandate."

In evaluating the economy, this statement continues to reaffirm that the unemployment rate has risen but remains low, and reiterates that there has been progress on inflation, but also continues to state that inflation "remains somewhat elevated."

Regarding the reduction of the balance sheet (balance sheet normalization), this statement still indicates that the FOMC will continue to reduce its holdings of U.S. Treasury securities, agency debt, and agency mortgage-backed securities (MBS). In other words, the Federal Reserve's plan for quantitative tightening (QT) remains unchanged The following red text shows the deletions and additions in this resolution statement compared to the previous one.