Fed cuts rates by 25 basis points at December meeting: Biggest takeaways from FOMC, Powell comments

Core Viewpoint - The Federal Reserve has cut its benchmark interest rate by 25 basis points, marking the third consecutive rate cut this year, with expectations for only one additional cut in 2026. The decision was contentious, with dissent among Fed members regarding the rate cut and future projections [1][2][3]. Economic Projections - The Fed revised its GDP growth forecast for next year to 2.3%, up from 1.8%, indicating a more optimistic economic outlook [14][30]. - Inflation is projected to decrease to 2.5% next year, down from a previous estimate of 2.6%, with an expected inflation rate of 3% by the end of this year [1][30]. - The unemployment rate is expected to remain stable at 4.4% next year, reflecting a slight decrease from the current rate of 4.5% [2][30]. Market Reactions - Following the Fed's announcement, stock markets reacted positively, with the Dow rising approximately 0.5% and the Russell 2000 reaching record highs [10][75]. - Bond yields have increased slightly, which is unusual given the expected rate cut, indicating market skepticism about the Fed's inflation targets [10][26]. Fed's Communication and Future Outlook - The Fed's statement included language suggesting a cautious approach to future rate cuts, emphasizing the need to assess incoming data and the evolving economic outlook [1][28]. - The upcoming change in Fed leadership is expected to influence future monetary policy, with speculation that the new chair may adopt a more dovish stance [45][46]. Labor Market and Economic Conditions - The Fed's decision to cut rates is seen as a response to a stabilizing labor market, despite concerns about the impact of AI on employment [80][81]. - The current economic environment is characterized by low jobless claims and a stable unemployment rate, suggesting resilience in the labor market [80][81]. Inflation and Affordability Concerns - There are ongoing discussions about the Fed's credibility in managing inflation, especially as it cuts rates while inflation remains above target [34][59]. - The affordability crisis is highlighted as a significant issue, with rising costs in healthcare, education, and housing impacting consumer spending [86][89]. Conclusion - The Fed's recent actions and projections indicate a cautious but optimistic outlook for the economy, with potential implications for future monetary policy and market performance as new data emerges [1][30][75].