The Federal Reserve maintained its cautious stance on monetary policy yesterday, announcing a 25-basis-point cut to the federal funds rate, bringing the target range to 4.25% to 4.50%. However, in a significant adjustment, the Fed revealed that it now anticipates only two quarter-point rate cuts in 2025, down from the four projected earlier this year. The central bank’s shift reflects its ongoing concerns about inflation and a careful approach to navigating the economic landscape.

Federal Reserve Chair Jerome Powell highlighted the delicate balance the Fed is striving to maintain. “We believe we’re in a good place,” Powell said at a press conference Federal Open Market Committee meeting, “but moving forward, the focus is on staying cautious to ensure we don’t inadvertently stoke inflation.” This tempered outlook reflects the central bank’s commitment to maintaining price stability while supporting economic growth.

Inflation Remains Stubborn

The Fed’s decision comes amid a slight uptick in its inflation outlook for 2025, with projections rising to 2.5% from 2.1% earlier. While inflation has eased from the highs of 2022, it remains above the Fed’s 2% target, prompting the central bank to take a measured approach to future rate changes. Powell acknowledged that while inflationary pressures have moderated, they still pose a challenge in achieving the Fed’s goals.

Market Reaction

Financial markets reacted swiftly to the announcement, with U.S. stock indexes closing lower on the day. The S&P 500 dipped 0.09%, and the Nasdaq composite shed 0.1% as investors recalibrated their expectations for monetary policy. Meanwhile, bond yields rose as the outlook for fewer rate cuts suggested a prolonged period of tighter financial conditions.

What’s Next?

As Powell reiterated, the Fed is entering a “new phase” where future policy decisions will hinge on evolving economic data. While the central bank remains committed to achieving its 2% inflation target, it must also consider the broader economic implications of its monetary policy. The cautious approach underscores the Fed’s efforts to balance the risks of economic overheating with the necessity of sustaining recovery.