The final meeting of the Federal Open Market Committee (FOMC) for 2024 delivered an interest rate cut as expected, marking the third cut for this cycle. The target range for the federal funds rate–the rate banks charge each other for overnight loans–was lowered to 4.25% to 4.5%, a drop of 25 basis points or 0.25%. However, the accompanying statement and projections signaled that the pace of easing in monetary policy will likely slow in 2025.

While the rate cut was no surprise, the Fed made several changes to its economic projections that suggest only two interest rate cuts of 25 basis points each in 2025–fewer than had been forecast at the last meeting. Notably, there was one dissent on the committee with Cleveland Federal Reserve Bank President Hammack voting against any rate cut.  

The Summary of Economic Projections (SEP) revised up its projections for economic growth and inflation in 2025 and 2026. With economic growth rising at a stronger rate than expected for this part of the cycle and inflation holding stubbornly above the 2.0% target, the Fed appears more cautious about the need for rate cuts. The inflation projections were particularly notable. The 2025 expectation for the deflator for overall personal consumption expenditures (PCE) was revised to 2.5% from 2.1%, a significant upward revision to the outlook.

The projections for the unemployment rate declined modestly for both 2024 and 2025, in line with the updated growth projections. While the unemployment rate has held relatively steady over the last few months, it's still up sharply over the last year, which may explain why the Fed decided to cut rates at this meeting. Maintaining full employment is part of the Fed's dual mandate, so a rising trend could suggest that policy is still tight.

Notably, the "dot plot" which shows where the members of the Federal Reserve expect the fed funds rate to be in the future, projected a shallower path of rate cuts over the next few years. In September, the median projection for the end of 2025 implied four more rate cuts next year, but the median projection from December’s meeting only projects two more cuts. Looking further ahead, the median projection for the year-end 2026 rate is now in the 3.25% to 3.5% range, compared to the 2.75% to 3.0% range projected from last quarter. In fact, four participants actually projected "no" rate cut at this meeting, suggesting that some non-voting members may have dissented if they were voting members.

The statement that accompanied the Fed's decision contained only one change. The statement added a reference regarding "the extent and timing" of additional adjustments, suggesting that it might pause its rate cutting in January. With a broad set of potential policy changes on the horizon that could raise inflation, such as tariffs, tax cuts, and immigration laws, the Fed may prefer to wait for more clarity before changing policy again in the near term.

Markets reacted with rates rising moderately across the yield curve. The dollar had a bigger reaction, moving up sharply against the currencies of major trading partners. All else being equal, higher relative interest rates make a currency more attractive to hold. With U.S. rates well above those in other major countries and likely to remain relatively high, the dollar is well supported.

Overall, the Fed is getting cautious. The economy is doing well, inflation isn't moving lower as quickly as it would like, and the labor market is still healthy. While the Fed appears to still believe that its policy is too restrictive, there are many policy unknowns on the horizon that could alter the outlook. It looks like that bumpy ride in the bond market will continue into next year.