US Fed cuts key rate a quarter point and signals fewer cuts ahead

WASHINGTON

The U.S. Federal Reserve cut interest rates by a quarter point Wednesday and signaled a slower pace of cuts ahead, as uncertainty grows over inflation and President-elect Donald Trump's economic plans.

Policymakers voted 11 to 1 to lower the central bank's key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement.

This is the final planned interest rate decision before outgoing Democratic President Joe Biden makes way for Republican Donald Trump, whose economic proposals include tariff hikes and the mass deportation of millions of undocumented workers.

These policies, combined with the recent uptick in inflation data, led some analysts to pare back the number of rate cuts they expect in 2025 ahead of Wednesday's meeting, predicting that interest rates will need to remain higher for longer.

All three main indexes in New York were sent spinning, led by a rout in high-flying tech titans.

The S&P 500 fell 2.9 percent, just shy of its biggest loss for the year, to pull further from its all-time high set a couple of weeks ago. The Dow Jones Industrial Average lost 1,123 points, or 2.6 percent, and the Nasdaq composite dropped 3.6 percent.

While inflation has "eased significantly," the level remains "somewhat elevated" compared to the Fed's long-term target of two percent, Chair Jerome Powell said Wednesday.

He added that the Fed was now "significantly closer" to the end of its current easing cycle.

In updated economic forecasts published alongside the rate decision, members of the Fed's rate-setting committee penciled in just two quarter-point rate cuts in 2025, down from an earlier prediction of four, and hiked their headline inflation outlook for next year, from 2.1 percent to 2.5 percent.

The Fed has made progress tackling inflation through interest rate hikes in the last two years and recently began paring back rates to boost demand in the economy and support the labor market.

But in the last couple of months, the Fed's favored inflation measure has ticked higher, moving away from the bank's target and raising concerns that the U.S. central bank's battle is not over.

The 19-member committee's median forecast for headline inflation in 2025 rose sharply in 2025 to 2.5 percent, up from 2.1 percent in September.

The growth outlook for this year also rose, climbing to 2.5 percent before cooling to 2.1 percent in 2025, up slightly from September.

The unemployment rate is expected to be slightly lower than previously expected this year at 4.2 percent and to then tick up slightly to 4.3 percent in 2025 and 2026.

Futures traders see a roughly 90 percent chance that the Fed will pause rate cuts next month and a probability of close to 60 percent that it will make no more than one cut in the whole of 2025, according to CME Group data.

Bank of Japan maintains key interest rate

The yen weakened against the dollar Thursday after the Bank of Japan kept borrowing costs unchanged, extending a retreat for the currency that came after the Federal Reserve forecast fewer rate cuts.

The BoJ said after a two-day policy meeting that it would hold rates at around 0.25 percent, pushing the yen cheaper than 155 per dollar.

Although the bank said in its policy statement that "Japan's economy has recovered moderately" and "is likely to keep growing," it also pointed to risks ahead.

These include "developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior."

Japanese businesses are also wary about the trade and investment environment, given Trump's pledge to impose tariffs on imports.