Washington has witnessed a significant move by the Federal Reserve as it cut its key interest rate by a quarter-point this Wednesday. This marks its third cut this year. However, the Fed also signaled a slower pace of rate cuts next year due to persistently elevated inflation.

Key Insights from the Fed's Decision

The Federal Reserve's 19 policymakers projected that they will cut their benchmark rate by a quarter-point just twice in 2025, down from their earlier estimate of four rate cuts in September. This indicates that consumers may not see a significant drop in borrowing rates for mortgages, auto loans, credit cards, and other forms of credit next year.The Fed's benchmark rate currently stands at 4.3% after the latest cut. This follows a steep half-point reduction in September and a quarter-point cut last month. Fed officials have emphasized that they are slowing down rate reductions as their benchmark rate approaches a "neutral" level. This neutral level is believed to neither stimulate nor hinder the economy.Chair Jerome Powell stated at a news conference that a slower pace of rate cuts reflects both the higher inflation readings this year and the expectation of higher inflation in 2025. He also mentioned that they are closer to the neutral rate, which is another reason to be cautious about further rate moves.This year's Fed rate reductions came after more than two years of high rates. While these high rates helped tame inflation, they also made borrowing expensive for American consumers. Now, the Fed is facing challenges as it aims to achieve a "soft landing" for the economy, where high rates curb inflation without causing a recession.Inflation remains a concern as it remains sticky. According to the Fed's preferred gauge, annual "core" inflation, which excludes volatile categories, was 2.8% in October, still above the central bank's 2% target. At the same time, the economy is growing briskly, suggesting that higher rates have not significantly restrained it.The pace of hiring has cooled since 2024 began, which is a potential worry as one of the Fed's mandates is to achieve maximum employment. However, the unemployment rate is still low at 4.2%, having risen nearly a full percentage point in the past two years.Powell acknowledged that the Fed is seeking to understand how tariffs and other policies proposed by President-elect Donald Trump could affect inflation and the economy. Until more details are available, the outcome of the presidential election adds to the economic uncertainty.The quarterly economic projections issued by the Fed on Wednesday show that overall inflation is expected to rise slightly from 2.3% now to 2.5% by the end of 2025. This makes it more difficult for the Fed to reduce borrowing costs as high interest rates are its main tool against inflation.The officials also expect the unemployment rate to inch up by the end of next year, from 4.2% to 4.3%. This slight increase may not justify many more rate cuts.Powell emphasized that from here on, it is a new phase and they will be cautious about new rate cuts.Beth Hammack, president of the Federal Reserve Bank of Cleveland, dissented from Wednesday's Fed decision as she preferred to keep rates unchanged. This was the first dissent by a Fed committee member since September.In conclusion, the Federal Reserve's interest rate cuts and future projections present a complex economic landscape with various challenges and uncertainties.