US Federal Reserve cuts interest rates, signals slower pace of future reductions

The US Federal Reserve cut interest rates on Wednesday and signaled it will slow the pace at which borrowing costs fall any further, given a relatively stable unemployment rate and little recent improvement in inflation.

"Economic activity has continued to expand at a solid pace" with an unemployment rate that "remains low" and inflation that "remains somewhat elevated," the central bank's rate-setting Federal Open Market Committee said in its latest policy statement.

"In considering the extent and timing of additional adjustments to the target range ... the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks," it said in new language that sets up a likely pause to rate cuts beginning at the January 28-29 meeting.

US central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025.

That is half a percentage point less in policy easing next year than officials anticipated as of September, with Fed projections of inflation for the first year of the new Trump administration jumping from 2.1% in their prior projections to 2.5% in the current ones - well above the central bank's 2% target.

Slower progress on inflation, which is not seen returning to the 2% target until 2027, translates into a slower pace of rate cuts and a slightly higher ending point of 3.1%, also hit in 2027, versus the prior "terminal" rate of 2.9% seen as of September.

Fed officials also boosted their estimate of the long-run neutral rate of interest to 3%.

The reduction in the benchmark policy rate to the 4.25%-4.50% range was opposed by Cleveland Fed President Beth Hammack, who preferred to leave the policy rate unchanged.

US Treasury bond yields rose across the curve after the release of the policy statement and projections, while the dollar gained ground. Stock prices retreated.

"While the Fed opted to round out the year with a third consecutive cut, its New Year's resolution appears to be for a more gradual pace of easing," said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions for Goldman Sachs Asset Management.

He added that "we expect the Fed to opt to skip a January rate cut, before resuming its easing cycle in March."