Federal Reserve Cuts Interest Rates by Quarter-Point

What's New

The Federal Reserve on Wednesday announced that the central bank is cutting interest rates by a quarter-point to between 4.25 and 4.5 percent.

Why It Matters

The federal funds rate is the target interest rate at which commercial banks borrow and lend their extra reserves to one another overnight. If the federal funds rate continues to decrease, the cost of consumer borrowing—including mortgages, auto loans and credit cards—should go down over time.

What To Know

The federal funds rate was raised by the Fed 11 times in 2022 and 2023 to curb high inflation, which hit both the United States and countries around the world after the COVID-19 pandemic. As inflation in the U.S. cooled, the Fed cut rates twice, once in September and once in November, before slicing them for a third time this year on Wednesday.

When Was The Last Fed Reserve Interest Rate Cut?

On September 18, the Fed cut interest rates by a half-percentage point to between 4.75 and 5 percent. Then on November 18, the central bank sliced rates again, this time by a quarter-point to between 4.5 and 4.75 percent.

Inflation is Rising Heading into 2025

Driven by higher costs for used cars, hotel stays, and auto insurance, inflation edged up slightly last month but remained well below its peak from two years ago.

Consumer prices rose 2.7 percent in November compared to the previous year, up from October's annual increase of 2.6 percent. On a monthly basis, consumer prices increased by 0.3 percent from October to November, marking the largest one-month rise since April.

The modest increase in inflation was thought by most economists and Wall Street traders to be unlikely to deter the Fed from proceeding with a widely anticipated quarter-point rate cut.

What People Are Saying

Federal Reserve Chairman Jerome Powell told reporters Wednesday, "The economy is strong overall and has made significant progress toward our goals over the past two years."

"With today's action, we have lowered our policy rate by a full percentage point from its peak, and our stance is now significantly less restrictive. We can therefore be more cautious as we consider further adjustments to our policy rate," Powell said.

What Happens Next

The Fed's 19 policymakers projected that the central bank will cut interest rates by a quarter-point only twice next year, down from their September estimate of four rate cuts in 2025. This caused U.S. stock indexes, which measure how the market is performing, to fall Wednesday.

The S&P 500 dropped 0.6 percent while the Dow Jones Industrial Average dipped 190 points (or 0.4 percent) and the Nasdaq composite decreased 0.6 percent Wednesday afternoon.

This article includes reporting from The Associated Press.

Update 12/18/2024, 2:53 p.m. ET: This article has been updated with additional information.