by Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The U.S. Federal Reserve (Fed) cut its key rates on Wednesday for the third time in as many meetings but suggested the pace of its monetary easing would now slow due to a relatively stable unemployment rate and a less significant decline in inflation.

“Economic activity continued to expand at a sustained pace, with unemployment remaining low and inflation remaining high,” wrote the FOMC, the central bank’s monetary policy committee, in its published statement following a two-day meeting.

“In considering the magnitude and timing of additional adjustments to the target range, the FOMC will carefully evaluate incoming data, the evolving outlook, and the balance of risks,” it added, using new wording that forecasts a likely pause in rate cuts from the January 28-29 meeting.

US central bank officials, in their new projections, now only foresee two additional rate cuts of a quarter of a percentage point by the end of 2025.

The Fed’s projections for inflation in 2025, which will be the first year of Donald Trump’s second presidential term, rose from 2.1% to 2.5%, well above the 2% target. the central bank.

“From now on, it is appropriate to proceed with caution and wait for progress on inflation (…) We are in a situation where the risks are balanced,” said Fed Chairman Jerome Powell, during the press conference which followed the institution’s announcements.

Jerome Powell described the Fed’s latest rate cut as “tighter” and noted that the slower pace of rate cuts planned next year takes into account higher-than-expected inflation in 2024.

Slower progress on inflation, which is not expected to return to the 2% target until 2027, is reflected in a slower pace of rate cuts and a slightly higher terminal policy rate, at 3.1%. , in 2027. In September projections, the Fed expected a “terminal” key rate of 2.9%.

Fed officials also revised upwards their estimate of the neutral long-term interest rate, estimated at 3%. This neutral rate neither stimulates nor slows economic growth.

As expected, the American central bank decided on Wednesday to reduce borrowing costs by 25 basis points, to a range of 4.25%-4.50%. Cleveland Fed President Beth Hammack was the only one to oppose this cut, preferring a status quo on rates.

In the bond market, U.S. Treasury yields rose across the curve as investors digested the Fed’s statement and new projections. The dollar was also gaining ground, while stocks on Wall Street were sharply lower.

“While the Fed has chosen to end the year with a third consecutive cut, its New Year’s resolution appears to be to proceed with more gradual easing,” commented Whitney Watson, head of fixed income at Goldman Sachs Asset Management.

“We expect the Fed to choose not to cut rates in January, before resuming its easing cycle in March,” she added.

TRUMP UNCERTAINTY

The Fed’s new benchmark rate is now 100 points below the peak reached in September, when the bank concluded that inflation was on track to return to the 2% target and that maintaining too much monetary policy restrictive for too long presented risks for the job market.

Since then, major measures of inflation have moved largely sideways, while continued low unemployment and stronger-than-expected economic growth have sparked debate within the Fed about the reality of inflation. restrictive monetary policy.

These questions are reflected in the steady increase in the long-term estimate of the neutral rate over the past year, from 2.5% to 3.0%.

The Fed, which raised rates aggressively in 2022 and 2023 to combat a surge in inflation, began its monetary easing cycle in September with a 50 basis point reduction in its borrowing costs. It then lowered its rates by a quarter of a point in November.

The quarterly projections communicated on Wednesday are the first since Donald Trump’s electoral victory on November 5. The latter’s program has created new uncertainty in the economic outlook, given its promises of tax cuts, increased customs duties and tougher measures against illegal immigration, with certain aspects of this policy being judged as inflationary according to analysts.

As Donald Trump takes office on Jan. 20, Fed officials said they cannot base monetary policy on campaign proposals that may or may not be implemented.

Fed officials, however, have likely worked out different scenarios. The institution’s projections show that growth will remain above potential, at 2.1% next year, while inflation will remain above target for two more years and the unemployment rate will not exceed 4.3%.

(Reporting Howard Schneider and Michael S. Derby; Claude Chendjou)

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