The Federal Reserve has cut interest rates by 25BPS

The Federal Reserve, as widely expected, reduced its benchmark interest rate by 25 basis points (bps) on Wednesday, setting the target range at 4.25% to 4.5%. This marks the third consecutive rate cut, following a 50-bps reduction in September and a 25-bps cut in November, bringing the total reduction to 100 bps this year. However, Fed policymakers signaled a slower pace for future rate cuts compared to earlier projections.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Federal Open Market Committee (FOMC) stated. “Labor market conditions have eased somewhat since earlier this year, with the unemployment rate moving up but remaining low. Inflation has progressed toward the Committee’s 2% goal but remains somewhat elevated.”

The statement emphasized that future adjustments to the federal funds rate would depend on economic data, evolving outlooks, and risks. The Fed also reaffirmed its commitment to reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities.

Recent economic data showed inflation rising 2.7% year-over-year in November, up slightly from 2.6% in October. Core inflation, which excludes food and energy costs, reached 3.3%. Meanwhile, the labor market remained robust, adding 227,000 nonfarm payroll jobs in November, significantly above the 12-month average of 186,000.

Chris Stanley, senior director at Moody’s, noted that the November Consumer Price Index (CPI) highlights the “long and variable lags” affecting Fed policy. Slowly adjusting components like rent and services continue to influence inflation trends. “Persistent inflation transforms interest rate risks into credit risks over time,” Stanley added, citing challenges for commercial real estate borrowers and dampened mortgage activity.

Market participants had anticipated the Fed’s move. The CME Group’s FedWatch tool showed that 98% of traders predicted the 25-bps cut, with a small minority expecting no change. However, some economists questioned the decision, given rising inflation.

Ermengarde Jabir, director of economic research at Moody’s, described the cut as potentially imprudent given recent inflation trends. She highlighted stress in commercial real estate, changes in discretionary spending, and widening capitalization rate spreads amid ongoing geopolitical tensions. “The trajectory of recent cuts, including September’s 50-bps reduction, may not align with macroeconomic conditions like low unemployment and strong GDP growth,” Jabir said.

The FOMC also updated its 2025 projections, making minor adjustments to GDP growth (2.1%, up from 2%), unemployment (4.3%, down from 4.4%), and PCE inflation (2.5%, up from 2.1%). Core inflation expectations also rose to 2.5%, up from 2.2%. The new forecast indicates that the federal funds rate will end 2025 at 3.9%, suggesting 50 bps of cuts in 2025 instead of the previously expected 100 bps.

Economists at Rithm Capital noted that uncertainties around trade and immigration policies persist, but business surveys show improved hiring expectations and higher pricing forecasts. “The pace of rate cuts is likely to slow unless inflation moves closer to the 2% target or labor market risks increase significantly,” their update stated.

In housing, HousingWire’s Mortgage Rates Center reported the 30-year fixed-rate mortgage averaging 6.85% on Tuesday, a 2-bps drop from the previous week. The 15-year fixed rate rose 1 bps to 7.02%.

“A more cautious Fed approach will keep borrowing costs elevated for longer,” said Sam Williamson, senior economist at First American. “Mortgage rates, tied to 10-year Treasury yields, are expected to decline to the mid-to-low 6% range by the end of next year.”