Federal Reserve Cuts Interest Rate, Stocks Slump

What Happened?

The Federal Reserve announced Wednesday its third consecutive interest rate cut for 2024 in a split deciding vote amid cooling inflation.

The Fed cut the benchmark rate by 25 basis points (0.25%) to a new range of 4.25%-4.5%.

In a statement, the central bank said the unemployment rate remains low and that progress had been made toward the Committee's 2% objective.

Consumers may see rate cuts as relief for those carrying credit card balances and other debts.

But the 2025 economic forecast shows only two rate cut projections down from four previously anticipated in September.

Members of the rate-setting committee now think it will be 2027 before inflation falls to the Fed's 2% target, according to reports.

The news sent shock waves on Wall Street as stock prices plummeted in the worst day for the market in four months. The Dow Jones Industrial Average fell more than 1,100 points for its biggest loss since August.

This marks the Dow's longest losing streak since 1974.

Newly appointed Cleveland Fed president Beth Hammack reportedly opposed Wednesday's rate cut, preferring to leave rates unchanged.

Fed Chair Jerome Powell said during a press conference that 'we're trying to make sensible policy as we go.' He added that the committee will 'have a much better idea' of where policy will go when policy becomes clear as factors remain uncertain.

Why it Matters

Consumer prices in November rose 2.7% on a yearly basis, amid the rise in housing and food costs.

President-elect Donald Trump has also vowed to introduce hefty tariffs on foreign imports and carry out plans of mass deportation which some say could accelerate inflation.

This has led economists at Barclays and Goldman Sachs to think that the Fed's decision of fewer rate cuts in 2025 is to prevent an overheated economy.

Powell has also acknowledged that some policymakers are factoring in Trump's planned policies into their inflation and rate cut estimates.

On the contrary, Trump has also proposed a range of tax cuts that include tipped income, overtime income, and Social Security benefits which can stimulate economic growth.

How it Affects You

While the economy looks to rebound heading into 2025, high interest rates for consumers will certainly remain a key focus in sectors like the housing market and manufacturing.

But for middle and working-class households, high delinquency rates, and credit card debt, are areas that may take a while for consumers to feel relief.