Federal Reserve Signals Potential Rate-Holding Period

By Michael S. Derby, Ann Saphir

(Reuters) – Federal Reserve policymakers, fresh from an interest rate cut this week, signaled their readiness to take a break from further reductions in borrowing costs next year as they assess progress in lowering inflation.

San Francisco Fed President Mary Daly, who supported the U.S. central bank’s decision on Wednesday to cut its benchmark overnight rate by a quarter of a percentage point to the 4.25%-4.50% range, and Cleveland Fed President Beth Hammack, who dissented against it, described the decision as a "close call."

While Daly and New York Fed President John Williams both expressed belief that the central bank would likely resume rate cuts next year, neither felt a rush was necessary.

Fed policymaker projections released on Wednesday indicated that most see two quarter-percentage-point rate cuts in 2025. In 2024, the U.S. central bank cut rates by 100 basis points, recalibrating monetary policy to a less-restrictive stance as inflation fell from earlier high levels and the labor market cooled.

"Now I feel we have the recalibration phase behind us, and we’re in the next phase, which is really looking at incoming information,” Daly said in an interview with Bloomberg Television.

Daly stated she was comfortable with the anticipated two rate cuts next year.

"I think we're in a great place, well-positioned for what lies ahead," Williams mentioned during an interview with CNBC. "We need to be data-dependent, and we have time to assess the data and risks to achieve our goals."

Williams’s comments followed a U.S. Commerce Department report indicating that inflation was at 2.4% last month, lower than expected by economists. The Personal Consumption Expenditures Price Index, excluding food and energy, rose 2.8%, aligning with Fed Chair Jerome Powell's cautious approach to further rate adjustments discussed in his post-meeting press conference.

The data encouraged financial markets to strengthen bets on a Fed rate cut in March, with another reduction likely by October. Prior to the report, traders had deemed a second Fed rate cut by the end of 2025 as roughly even odds.

In her dissenting statement this week, Hammack expressed that the economy's strength did not support another rate cut at this time and emphasized the need to hold the policy rate steady until more evidence indicated inflation was on its way back to the Fed’s 2% target.