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The Federal Reserve cut interest rates by a quarter of a percentage point on Wednesday, signaling a future weakening in interest rates and triggering a sharp selloff in financial markets. Policymakers voted 11-1 to cut the central bank's key interest rate to 4.25 percent to 4.50 percent, the Federal Reserve said in a statement. However, the expected number of quarterly rate cuts next year also halved from an average of four points in September to just two on Wednesday, surprising the market. All three major Wall Street indexes fell sharply, but U.S. Treasury yields rose as traders digested the prospect of higher interest rates in the coming years. Federal Reserve Chairman Jerome Powell told reporters on Wednesday that inflation had moderated "significantly" but remained "slightly above" the Fed's long-term target of 2%.

He said he was "very optimistic" about the state of the U.S. economy, adding that the Fed was now "very close" to the end of its tapering cycle. That's before Democratic President Joe Biden yields to Republican Donald Trump, whose economic proposals include higher tariffs and mass deportations of millions of illegal workers. The nonpartisan Congressional Budget Office (CBO) estimates that the new tariffs will dampen economic growth and increase inflation. He warns that Trump's victory in November's presidential election has led some analysts to reduce the number of rate cuts in 2025, potentially forcing the Fed to keep long-term interest rates high. The Federal Reserve has made progress over the past two years in fighting inflation by raising interest rates without destroying growth or unemployment, and recently began lowering interest rates to boost demand in the economy to stimulate and support the labor market.

But in recent months, the Fed's preferred inflation indicator has been trending higher and away from the central bank's target, raising fears that the fight against inflation is far from over. Diane Swank, chief economist at KPMG, said members of the Federal Open Market Committee (FOMC), which sets the Federal Reserve's interest rates, now "need more improvement in inflation to lower interest rates further." said a note released after the decision. In the latest economic forecasts released at the same time as the rate decision, the 19-member FOMC decided to cut interest rates by an average of just two-quarters of a basis point in 2025, halving the number of rate cuts. It also raised its forecast for overall U.S. inflation to 2.5% next year and doesn't expect it to return to 2% until 2027.

In good news for the world's largest economy, FOMC members raised their growth forecast to 2.5% this year and 2.1% in 2025. Politicians now assume that the unemployment rate will fall slightly below 4.2 percent this year. It will rise slightly to 4.3 percent in 2025 and 2026, but at least one analyst thought that number was too optimistic. In a note to clients after the decision, Samuel Tomes, chief U.S. economist at Pantheon Macroeconomics, said: "The rate cut will likely come sooner than the Fed expects as the unemployment rate is higher than the new forecast."

(Video Source: Federal Reserve)