The Federal Reserve, in its latest medium-term projections for interest rates released on Wednesday, predicted only two quarter-point rate cuts in 2025, a reduction smaller than what was previously anticipated. This forecast was part of the central bank's updated dot-plot, which reflects the individual rate expectations of its members.
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| Annabelle Gordon | Reuters |
According to the projections, the Fed expects its benchmark lending rate to drop to 3.9% by the end of 2025, translating to a target range of 3.75% to 4%. This is a departure from the September forecast, which indicated four quarter-point cuts, or a full percentage point decrease, during 2025.
During the Fed's final policy meeting of the year, held on Wednesday, the committee lowered its overnight borrowing rate to a target range of 4.25% to 4.5%. Out of the 19 officials involved, 14 projected no more than two quarter-point rate cuts in 2025, while only five members anticipated more than two rate cuts within that year.
Looking beyond 2025, officials suggested, based on quarter-point increments, two additional cuts in 2026 and one more in 2027. Over the long term, the committee estimates the “neutral” funds rate to settle at 3%, which is 0.1 percentage points higher than the September update. This neutral rate has gradually edged upward over the course of the year.
The Fed's projections also revealed slightly elevated expectations for inflation. Using its preferred inflation gauge, the committee revised its headline inflation estimate to 2.4% and its core inflation estimate to 2.8%, compared to September's figures of 2.3% and 2.6%, respectively.
Additionally, the Fed raised its forecast for full-year GDP growth to 2.5%, marking a half-percentage-point increase from the September projection. However, growth is expected to decelerate in subsequent years, aligning with the long-term GDP growth projection of 1.8%.
The unemployment rate forecast also saw an adjustment, with the estimate lowered to 4.2% from the previous 4.4%.
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