The Federal Reserve announced a widely anticipated 25-basis-point interest rate cut at its December meeting Wednesday, lowering the federal funds rate to a range of 4.25% to 4.5%.
The cut is the third consecutive reduction in borrowing costs following a 50-basis-point cut in September and a 25-basis-point move in November and brings rates to the lowest level since January 2023.
The Fed now projects two additional 0.25% rate cuts in 2025, a meaningful revision from the full percentage point of cuts expected in September. Markets reacted sharply lower following the Fed's decision with the SPDR S&P 500 (NYSE: SPY) ending the session 2.98% lower at $586.28 and the Invesco QQQ Trust (NASDAQ: QQQ) closing 3.61% lower at $516.47.
Expert Ideas: Chris Zaccarelli, chief investment officer for Northlight Asset Management, said that markets are forward-looking and reacted to the Fed's 2025 projection and not the quarter-point cut that it also delivered.
"Santa came early and dropped a 25-bps rate cut in the market's stocking but accompanied it with a note saying that there would be coal next year," Zaccarelli said.
Bill Adams, chief economist for Comerica Bank, said the Fed is reacting to the incoming Trump administration's policies, which it sees as most likely to boost growth and inflation, as well as tighten the job market.
Trump does not have much control over the pace of rate cuts in the near term, Adams said, but "that could change in 2026 if President-elect Trump gets the Senate to confirm a new Fed chair who is more sympathetic to his policy goals."
Charlie Ripley, senior investment strategist for Allianz Investment Management, highlighted the growing concerns around inflation and the Fed's dot-plot, which shows shallower rate cuts ahead in both 2025 and 2026.
"The main takeaway from today's Fed meeting was that inflation risks are back, and the Fed is clearly concerned," Ripley said.
"The Fed has been able to maneuver 100 basis points of cuts so far in this cycle but given the trajectory of the economy and the recent uptick of inflation, it is going to be more difficult for the Fed to provide basis to continue cutting rates at the same pace," he added.