Fed opts for cautious interest rate policy: Markets react to surprising forecast

The financial markets were unsurprised when the Federal Reserve cut interest rates by 25 basis points. A more significant reaction, however, occurred to the forecast that the Federal Open Market Committee (FOMC) expects only two more rate cuts. This prospect caused stock prices to plummet. Mary Daly, President of the Federal Reserve Bank of San Francisco, stated in an interview with Yahoo Finance that the decision to cut rates was "a close call" that required "a lot of deliberation." Nevertheless, she ultimately deemed it appropriate to reduce the rate by 25 basis points, achieving a total recalibration of 100 basis points. Daly sees this as an adjustment to the interest rate level that fits the current economic situation, especially considering the progress in inflation control and the balanced labor market situation—one job offer for every unemployed worker. Daly considers the "recalibration period" to be concluded, allowing the Fed to slow down and make decisions based on new data. Regarding the outlook for the year 2025, Daly emphasizes that the forecasts are merely projections. Nonetheless, the Fed remains committed to reducing inflation, which is expected to require restrictive measures in the current year. If inflation rises, Daly does not rule out interest rate hikes, although this currently seems unlikely. Daly clarifies: "I don't see us being done with rate cuts, but we will slow the pace of adjustments." What will Daly focus on in her next interest rate decision? Besides inflation and employment data, feedback from her district is also crucial. Observations on whether companies plan to hire or act cautiously play a role. Daly notes that while companies aren't talking about layoffs, they are becoming more cautious about hiring and considering whether to fill open positions or not.