Fed reduces benchmark rate by a quarter point, sees two cuts next year instead of three – The Boston Globe

The Federal Reserve reduced interest rates for a third straight time

The Federal Reserve on Wednesday reduced interest rates for a third straight time, but officials signaled they would slow the pace of cuts in the new year, a shift that the sent stock prices lower and set up a possible showdown with President-elect Donald Trump, who has said he wants borrowing costs to fall quickly.

As expected, Fed officials wrapped up their last meeting of the year with a vote to lower their benchmark lending rate by a quarter of a percentage point, to about 4.3 percent. The so-called federal funds rate can influence a range of borrowing costs, including on credit cards, mortgages, and business loans.

But the decision was accompanied by a surprise: new projections by Fed policy makers that they expect to cut rates twice next year, down from the four cuts they estimated in September. Officials also raised their forecast for inflation.

Central bankers have decreased their main rate by a full point since they began easing credit in September. A sharp decline in inflation, combined with a resilient job market, has given the Fed flexibility to reduce borrowing costs from levels that have pounded housing and construction and curbed spending by low-income consumers.

“Our policy stance is now significantly less restrictive,” Fed chair Jerome Powell told reporters during a news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”

Committee members have turned more cautious for several reasons, Powell said: the economy is healthier and inflation more persistent than some policy makers believed a few months ago; they are waiting for more details on President-elect Donald Trump’s economic plans; and they have yet to determine the ideal level for rates that would neither unduly boost nor hinder growth.

Fed projections “officially by default have to be based on current economic policies,” Brian Bethune, a Boston College economist, said in an email. ”The probability that policies will change in the first quarter of 2025 are extremely high,’’ he said, noting that Trump’s proposed 25 percent tariffs on Canada and Mexico “would induce forceful retaliation” and potentially a recession.

The Fed projected that inflation would end next year at 2.5 percent, as measured by the Personal Consumption Expenditures index, up from its previous forecast of 2.1 percent. Unemployment would average 4.3 percent in the fourth quarter of 2025, compared with a 4.4 percent estimate in September.

The Standard & Poor’s 500 index fell nearly 3 percent following the Fed’s announcement, its worst day since August. US government bond prices fell, sending yields higher, and the dollar rose.

“The market is going to have to come to grips with a potentially less accommodative Fed,” said Eric Merlis, co-head of global markets at Citizens Bank in Boston.

Larry Edelman can be reached at larry.edelman@globe.com.