Fed signals slower rate cuts amid rising inflation, upgraded GDP forecasts

In its latest policy meeting, the Federal Reserve lowered its benchmark interest rate by 25 basis points, taking it to a target range of 4.25%-4.50%. However, officials signalled just two additional rate cuts in 2025, down from the four forecasted in September.

The revised projections reflect heightened caution as the Fed grapples with persistent inflation and an economy performing above expectations.

The Fed upgraded its GDP growth forecast for 2024 to 2.5%, compared to the 2% projected in September, citing resilient economic activity. However, growth is expected to taper to its long-term trend of 1.8% from 2026 onward.

Inflation estimates were revised upwards, with the 2025 forecast now at 2.5%, up from 2.1%, and core inflation projected at 2.8% for the same year.

Policymakers reduced their unemployment outlook for 2025, reflecting confidence in a strong labour market.

Fed Chair Jerome Powell highlighted the need for “policy recalibration,” emphasising that restrictive monetary conditions were no longer as necessary. Yet, Powell underscored the importance of controlling inflation, which remains above the Fed’s 2% target.

Also read: US Fed meeting LIVE Updates: Federal Reserve lowers rates by quarter point, signals two cuts for 2025

The statement hinted at a “slower pace” of cuts, with officials indicating a “wait-and-see” stance heading into 2025.

The revised outlook placed additional pressure on markets, eroding earlier gains in the Dow Jones Industrial Average. The S&P 500 and Nasdaq Composite also deepened their losses as investor sentiment soured over the slower pace of anticipated rate reductions.

The Dow Jones Industrial Average is on track for its 10th consecutive losing session, which would mark its longest losing streak since 1974. The index shed 191 points, or 0.4%, earlier in the day, weighed down by investor concerns over the Fed’s rate outlook.

The S&P 500 and Nasdaq Composite also traded in the red, both down 0.7%, as cautious sentiment rippled through markets. Nvidia, which recently entered correction territory, rebounded with a 4% gain, while Broadcom slid over 3% amid ongoing sector rotation.

The Dow has been particularly affected by a shift out of traditional industrial stocks into technology shares, with the century-old index now sitting around 3% below its all-time high. In contrast, the Nasdaq remains up nearly 5% for December, driven by strong inflows into tech stocks, while the S&P 500 remains close to its record highs, demonstrating broader market resilience.