Federal Reserve Cuts Rates For Third Time, Stocks Drop
By PATRICK LAVERY
Experts and analysts had been predicting it for weeks, so the first shoe to drop Wednesday afternoon was expected: The Federal Open Market Committee voted to cut its key interest rate by another quarter-point, its third consecutive cut after more than a year of inaction, and a resultant reduction of 100 basis points since September.
The other shoe, while also possibly anticipated, was somewhat more dramatic. As the Wall Street Journal and others were quick to report, stocks took the news that the FOMC’s Summary of Economic Projections is foreseeing just two rate cuts in 2025, as opposed to the four that had been rumored, rather roughly.
In the final moments of the trading day, the Dow Jones Industrial Average – already on a nine-day losing streak even before Wednesday’s opening bell – tumbled more than 1,100 points. The Nasdaq Composite and S&P 500 indexes, by percentage, shaved even more than the Dow, each of the latter two taking a 3% or more loss on Wednesday.
Even given the data contained in the SEP, and the considerations as to how individuals or markets might react, Federal Reserve Board Chairman Jerome Powell said in prepared remarks following the wrap-up of the FOMC’s two-day summit that everything the Fed plans to accomplish in the next year is ultimately subject to change.
“We are not on any preset course,” Powell said. “We have been moving policy toward a more neutral setting in order to maintain the strength of the economy and the labor market while enabling further progress on inflation. With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive. We can therefore be more cautious as we consider further adjustments to our policy rate.”
As Powell recapped in his press conference, total Personal Consumption Expenditures prices were up 2.5% over the previous 12 months ending with November, with core PCE prices – excluding the volatile food and energy categories – rising 2.8%.
That’s a step in a positive direction, Powell said, but still meaningfully short of the Fed’s long-standing goal and guiding light of getting inflation down to 2%. Inflation projections for 2025, meanwhile, are now slightly higher than they were in September’s SEP.
“We know that reducing policy restraint too fast or too much could hinder progress on inflation,” Powell said. “At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will assess incoming data, the evolving outlook, and the balance of risks.”
While there was no indication when the two forecasted cuts in 2025 would be made, if that even holds true. The first FOMC meeting of the new year will come shortly after a change of power in Washington, on January 28 and 29.
How will this affect the housing market?
Chief Economist Lawrence Yun of the National Association of Realtors issued a statement after the meeting. He said despite the cuts to the short-term interest rates by the Federal Reserve, mortgage rates have largely refused to budge.
“Given that mortgage rates have stayed above 6% for more than two years, consumers are getting used to the new normal,” Yun said.
Yun said he expects mortgage rates will “modestly trend lower” in 2025.
Added supply to the multifamily housing market should also cool rental prices, Yun said.