Fed's Powell Shocks Markets After Interest Rate Cut: 'It's A New Phase'

In a year marked by three consecutive rate cuts totaling 100 basis points, Federal Reserve Chair Jerome Powell said the Fed is shifting gears to a more cautious stance heading into 2025 as interest rates move tantalizingly close to a neutral environment for the economy.

Following the latest 25-basis-point reduction announced Wednesday, the federal funds rate now sits at 4.25%-4.5%, the lowest since January 2023.

“We’re significantly closer to neutral,” Powell said during the post-meeting press conference. “From this point forward, it's appropriate to move cautiously and look for further progress on inflation,” he added.

Powell Confirms Slower Rate Cuts On The Horizon

“I think from here it’s a new phase and we’re going to be cautious about further cuts," the Fed chair said.

The Fed’s December dot plot projects only two additional 25-basis-point cuts in 2025, compared to the four anticipated in September. The updated projections peg the federal funds rate at 3.9% by the end of next year and 3.4% by the close of 2026.

“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,” Powell said.

This shift toward caution was reflected in the FOMC's statement, which introduced new language about the “extent and timing” of future adjustments.

Powell indicated that “extent” refers to how much room the Fed has left to cut rates without overstimulating the economy, while “timing” suggests a slower pace of change going forward.

Inflation Job Not Over, Labor Market Gradually Softer

Despite this year's progress, inflation remains a thorn in the Fed's side.

Headline PCE inflation is now expected to reach 2.5% in 2025, up from the September estimate of 2.1%. Core PCE inflation is also forecast to hit 2.5%, up from 2.2% previously.

Powell highlighted the challenges of achieving the Fed's 2% target: "While we've made a great deal of progress, it has been slower than we had hoped."

Despite the challenges, Powell struck a confident tone about the Fed's ability to bring inflation sustainably back to its 2% target.

"We're not going to settle for anything less than 2%," Powell said. "It might take another year or two, but we are on the path."

Powell described conditions as “solid,” with the unemployment rate at 4.2%, the same as it was in July.

While job creation has slowed, Powell dismissed concerns of significant downside risks. "The labor market is gradually cooling in an orderly way," he said.

The hiring rate remains low, signaling reduced demand for workers, but layoffs are not increasing, Powell said. "This is a good labor market," he added. “Wages are growing at a healthy, sustainable pace, and we aim to keep it that way.”

Trump And Tariffs Risks

Powell also addressed questions on fiscal policy risks under the incoming Trump administration and inflationary effects of tariffs.

When asked whether policymakers factored in risks tied to the potential policy shifts under a new Trump administration, Powell struck a measured tone, stating the Fed is monitoring potential fiscal developments but refraining from speculation until specific policies are announced.

"We're in a good place, but fiscal changes can influence inflation and economic growth," he said.

“We're in the phase of monitoring potential outcomes, not making policy assumptions.”

On tariffs, Powell said that while one-time tariff-driven price increases don't always translate into persistent inflation, the Fed will take a “careful and measured approach” in evaluating the effects if new tariffs are enacted.

Market Plummets After Powell’s Remarks

Following Powell’s remarks, Fed futures imply just 37 basis points of cuts in 2025, down from 49 basis points immediately after the Fed statement.

The S&P 500 index — as tracked by the SPDR S&P 500 ETF Trust SPY — extended its session losses during Powell’s press conference, tumbling by 2.6%, eyeing its worst session since September 2022.

The Nasdaq 100 tumbled by 3.5%, the Dow fell 2.3% and small cap stocks in the Russell 2000 tanked over 4%.

The U.S. dollar index, trackd by the Invesco DB USD Index Bullish Fund ETF UUP, rocketed by 1.2%, reaching highs last seen in November 2022.

Gold plummeted over 2% and silver fell by 3.5%.

Bitcoin nosedived by 5.5%, hovering around $100,000.