Investing.com — The Federal Reserve cut interest rates by 25 basis points on Wednesday, but halved the number of rate cuts expected for next year as the battle to bring inflation down toward the central bank’s target is now expected to take longer than previously expected.           

The Federal Open Market Committee, the FOMC, cut its by 25 bps to a range of 4.25% to 4.5%.

“Today was a closer call, but we decided it was the right call because we thought it was the best decision to foster achievement of both of our goals, maximum employment and price stability.” Fed chairman Jerome Powell said Wednesday. 

In what was the third rate cut of the year since the first cut in September, Fed members now appear to be easing away from a deep rate cut cycle, betting on fewer rate cuts ahead.

Fed members now see the benchmark rate falling to 3.9% for next year, suggesting just two rate cuts, compared with a prior forecast in September for four cuts. Rates are seen falling to 3.4% in 2026, up from a prior forecast of 2.9%. Rates are expected to reach 3.1% by 2027, up from 2.9% previously.  

Powell pointed to stronger economic growth in second half of 2024, a lower downside risks for the labor market as well as uncertainty on inflation as factors that contributing to the slower path of rate cuts.

The Fed chief also pointed to expectations that a higher neutral rate suggests that destination end game for interest rates cuts are closer than previously expected. The Fed lifted its expectations for longer-run interest rate to 3% from 2.9% previously.   

“The economy grew faster in the second half of 2024 than we had expected, and is expected to be above our expectations,” Powell said, adding that uncertainty around inflation also played a role in the Fed’s thinking on future interest rate cuts.

“I also point out that we’re closer to the neutral rate, which is another reason to be cautious about further moves,” he added.

The incoming Donald Trump administration, with inflationary policy expected, also appeared to filter into some Fed members thinking on the rate cut outlook.

“Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of fiscal policies into their forecast at this meeting,” Powell said.

The shallower rate-cut path comes as the Fed members expect inflation to reach the 2% target later than previously expected amid ongoing economic growth and a stronger labor market.

The core personal consumption expenditures price index, the Fed’s preferred inflation measure, is forecast to be 2.5% in 2025, up from a prior forecast in September of 2.2%. For 2026, inflation is estimated to slow to 2.2%, up from a previous estimate of 2.2%, and then reach the 2% target by 2027.  

The unemployment rate is now expected to rise to 4.3% in 2025, down from a prior estimate of 4.4%, and remain at this level through 2027.

The labor market outlook coincides with expectations for stronger economic growth, with Fed members now expecting GDP at 2.1% for 2025, compared with 2% previously, before eventually falling to 1.9% in 2027, down from 2% previously.