U.S. Federal Reserve trims interest rates by another 0.25%, signals less for 2025

Richard Schmidt

December 18, 2024

Key messages

The target for the federal funds rate has been cut to 4.25-to-4.5%.
Growth and inflation expectations were revised higher, as were interest rate projections.
The pace of future cuts will likely slow as the U.S. Federal Reserve proceeds with caution.

With U.S. economic growth and inflation expected to be higher than previously projected, the U.S. Federal Reserve (Fed) trimmed its target for the federal funds rate by another 0.25%. The target range is now 4.25-to-4.5% after the cut that was widely anticipated by markets.

Of note, the Fed maintained that “the risks to achieving its employment and inflation goals are roughly in balance.” Additionally, the decision was not unanimously agreed upon, with one Federal Open Market Committee (FOMC) member voting against the move. This is the second time in the last three FOMC meetings since September where there was dissent.

Once again, Fed Chair Powell dodged questions about the implications of the incoming Trump/Vance administration and how it has or will impact the Fed’s decision-making process, only conceding that it is a source of uncertainty.

Economic projections recalibrated

From the Fed’s press release, “recent indicators suggest that economic activity has continued to expand at a solid pace… Labour market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress towards the Committee’s 2% objective but remains somewhat elevated.”

Short term economic growth was revised higher from the Fed’s September projections (2.5% for 2024, up from 2% and 2.1% for 2025, up from 2%), unemployment was revised lower (4.2% for 2024, down from 4.4% and 4.3% for 2025, down from 4.4%) and core inflation was also revised higher for 2024 (2.8% from 2.6%), 2025 (2.5% from 2.2%) and 2026 (2.2% from 2.0%).

Slowing the pace of cuts in 2025 and proceeding with caution

The federal funds rate is now meaningfully lower, down 1% since the Fed started cutting rates earlier in the year, making economic conditions significantly easier. The Fed feels that the target rate range is sufficiently restrictive to further pull inflation and employment towards its 2% and maximum employment goals.

In September, the Fed signalled an additional 1% worth of cuts for 2025. This expectation was halved in this month’s Summary of Economic Projections. We are aligned with this outlook. The median federal funds rate is now 3.9% for 2025 (up from 3.4%), 3.4% for 2026 (up from 2.9%), 3.1% for 2027 (up from 2.9%) and 3% longer term (up from 2.9%).

Views on the current environment

The base case scenario should see equities continue to appreciate. With that said, upside may be limited due to already high valuations and market concentration. The incoming U.S. administration, geopolitical risk, and still weaker growth out of the Eurozone remain some of the key risks.

The Fed’s next interest rate announcement is scheduled for January 29^th.

Richard Schmidt

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

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