Nonetheless, Powell added that policy is still “meaningfully” restraining economic activity, and the Fed is still “on track to continue to cut.” To make additional rate cuts, Powell said, officials will have to see more progress on inflation, which he said has been moving “sideways.”

Powell also fielded a question about how the central bank may respond to potential tariffs from the Trump administration. The chair said some policymakers have begun to incorporate the potential impact of higher tariffs that President-elect Donald Trump may implement. But he said the impact of such policy proposals is highly uncertain at this point. “We just don’t know, really, very much at all about the actual policies,” he said. “So it’s very premature to try to make any kind of conclusion.”

Fed Looks to the Future

Policymakers have now lowered their benchmark lending rate by a full percentage point since mid-September, when they began cuts with an aggressive half-point move. At the time, they were encouraged by falling inflation and worried that the labor market was approaching a dangerous tipping point. Since then, the landscape has shifted. The labor market has proven resilient, with payrolls growing by an average 173,000 over the past three months. The unemployment rate ticked up to 4.2 percent in November, but remains low by historical standards.

Powell said earlier this month that downside risks to the labor market appear to have receded. Policymakers now expect the unemployment rate to be around 4.3 percent in 2025, updated projections show. They have also raised their forecast slightly for economic growth in 2025, to 2.1 percent.

Meanwhile, recent price data has raised concerns that inflation may be stalling above the Fed’s 2 percent target, prompting a number of Fed officials to say they’d prefer to slow the pace of cuts. Some have done so while voicing confidence that inflation will continue to decline, pointing to factors such as an anticipated slowdown in housing costs. Others, like Fed Governor Michelle Bowman, have emphasized that inflation remains uncomfortably above the Fed’s goal.

The median projection for inflation at the end of next year jumped to 2.5 percent, from 2.1 percent in September.

Officials have again raised their median estimate of where the policy rate will settle over the long run, from 2.9 percent to 3 percent. Officials have said there is substantial uncertainty over where that so-called ‘neutral rate,’ which neither promotes nor inhibits economic activity, lies following the Covid-19 pandemic. Some have suggested the neutral rate has moved higher, meaning officials can reach it with fewer cuts than previously anticipated.

President-elect Trump’s proposed policies on trade, immigration, and taxation add another element of uncertainty to the inflation outlook. Depending on how they are structured, such policies could put upward pressure on inflation and constrain the labor market, according to some estimates. Powell has said the Fed is modeling and evaluating Trump’s proposals, but not yet incorporating them into decisions because it’s unclear what specific form the policies will take.

The Fed also announced it would reduce the rate it pays lenders using its overnight reverse repurchase (RRP) facility by 30 basis points (bps). That effectively lowers the RRP rate by 5 bps relative to the fed funds target range, aligning it with the lower bound. The facility is designed to help put a floor under the Fed’s target for the federal funds rate by soaking up cash from outside the banking system. The move may be aimed at pre-empting tightness in money market rates. It may also provide extra room for the Fed to shrink its balance sheet further by driving more money into bank reserves.

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