The Federal Reserve (Fed) lowered interest rates by 0.25% and sent a more cautious message about the path of rate cuts through 2025. Markets expected today’s rate cut and short-term market yields have reflected a “go slow” approach on monetary policy for several weeks. Regardless, the immediate reaction to the Fed’s message and their expectation for stickier inflation was unsettling for equity and bond markets.

Current Conditions – Economic growth remains solid. Downside risks to the economy have diminished, but labor growth is gradually cooling. Progress on inflation has been slower than anticipated. The Fed’s preferred measure of inflation stood at 2.8% through October versus 3.1% at the end of 2023. The Fed projects improvement in core inflation will be similarly gradual through 2025 and 2% will not be reached until 2027. Previously, the Fed had projected hitting the inflation target at some point in 2026.

Forward Guidance – At today’s press conference, Chair Powell stated the Fed will cut rates when it sees further progress on inflation. According to Powell, the Fed’s cumulative easing of 1.00% since September makes policy significantly less restrictive and allows the Fed to be more cautious going forward. The Fed’s revised projection on inflation through 2025 to 2.5% from a previous estimate of 2.1% led the Committee to reduce the number of expected cuts. The median Fed voter expects another 0.50% of rate cuts will be appropriate next year given the stubborn pace of improvement in inflation.

Policy/Market Reaction – Today’s move was approved by the Committee with one dissent in favor of keeping policy unchanged. Prior to the release, short-term yields discounted another 2 to 3 rate cuts next year. Markets are interpreting the news as a more hawkish turn in policy with longer-term yields rising by 0.10%, Dollar appreciation against major trading partners and equity markets trading 2-3% below the day’s highs. 

Gary Pzegeo, CFA, is co-chief investment officer of CIBC Private Wealth. His responsibilities include chairing the Asset Allocation Committee and overseeing the investment administration, portfolio oversight, and fixed income and equity trading functions.