The Federal Reserve announced a 25 basis point reduction in the federal funds rate in December 2024, marking the third consecutive rate cut this year. The new range for borrowing costs stands at 4.25%-4.5%, which aligns with market expectations. This decision signals the Fed’s continued efforts to support economic growth, though it also suggests that future rate cuts may be more gradual than initially projected.

Revised Economic Forecasts for 2024-2026

The Fed’s updated economic projections show a more optimistic outlook for the economy. GDP growth forecasts for 2024 have been raised to 2.5%, up from the previous 2%, with an upward revision for 2025 to 2.1% from 2%. The growth rate for 2026 remains unchanged at 2%. In addition, the Fed adjusted its inflation projections for both PCE and core PCE. The inflation forecast for 2024 has been increased to 2.4% (from 2.3%), while projections for 2025 and 2026 have also been revised higher, signaling expectations for persistent inflationary pressures in the near term.

Lower Unemployment Outlook

The Fed’s revised forecasts also indicate a more favorable unemployment outlook. The unemployment rate for 2024 is now projected to be 4.2%, down from the earlier forecast of 4.4%. The forecast for 2025 has also been lowered to 4.3% from 4.4%, while the unemployment rate for 2026 is expected to remain steady at 4.3%. This lower unemployment projection reflects the Fed’s confidence in the resilience of the labor market despite ongoing economic challenges.

Future Rate Cuts to Slow

Looking ahead to 2025, the Fed’s “dot plot” suggests that policymakers now expect only two additional rate cuts totaling 50 basis points, a significant reduction from the full 1% of cuts projected in the previous quarter. This shift in expectations indicates that while the Fed is committed to supporting economic growth, it is adopting a more cautious stance on rate reductions in the coming years.