The United States Federal Reserve has cut interest rates but signalled it will slow the pace at which borrowing costs fall any further, given a relatively stable unemployment rate and little recent improvement in inflation.

“Economic activity has continued to expand at a solid pace” with an unemployment rate that “remains low” and inflation that “remains somewhat elevated”, the central bank’s rate-setting Federal Open Market Committee said in its latest policy statement on Wednesday.

“In considering the extent and timing of additional adjustments to the target range … the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” it said in new language that sets up a likely pause to rate cuts beginning at the January 28-29 meeting.

US central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025.

That is half a percentage point less in policy easing next year than officials anticipated as of September, with Fed projections of inflation for the first year of the new Trump administration jumping from 2.1 percent in their earlier projections to 2.5 percent now – well above the central bank’s 2 percent target.

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“From this point forward, it’s appropriate to move forward cautiously and look for progress on inflation … from now, we are in place where the risks are in balance,” Fed Chair Jerome Powell said in a news conference after the end of the central bank’s two-day policy meeting

Powell described the latest rate cut as a “closer call” and noted that the slower pace of projected rate cuts next year reflected higher inflation readings in 2024.

Slower progress on inflation, which is not seen returning to the 2 percent target until 2027, translates into a slower pace of rate cuts.

Fed officials also boosted their estimate of the long-run neutral rate of interest – the level that is thought to neither spur nor hinder the economy – to 3 percent.

The reduction in the benchmark policy rate to the 4.25 percent to 4.5 percent range was opposed by the president of the Federal Reserve Bank of Cleveland, Beth Hammack, who preferred to leave the policy rate unchanged.

“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing,” said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions for Goldman Sachs Asset Management. Watson added that “we expect the Fed to opt to skip a January rate cut, before resuming its easing cycle in March.”

Trump uncertainty

The new policy rate is now a percentage point lower than the peak reached in September when officials concluded inflation was dependably on the way back to the 2 percent target and that there were risks to the job market of keeping monetary policy too tight for too long.

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Key measures of inflation since then, however, have largely moved sideways, while continued low unemployment and stronger-than-expected economic growth have sparked debate among policymakers about whether monetary policy is as tight as thought.

The latest quarterly projections are the first since President-elect Donald Trump’s victory in the November 5 election, which introduced a new level of uncertainty into the economic outlook given his campaign promises for tax cuts, tariff hikes and a crackdown on unauthorised immigration – aspects of which analysts see as inflationary.

Trump doesn’t take office until January 20, and Fed officials have said they can’t base monetary policy on campaign proposals that may or may not be enacted.

Still, Fed staff have likely been gaming out different scenarios, and policymakers’ projections show growth remaining above potential at 2.1 percent next year, inflation staying above target for two more years, and the jobless rate never rising above 4.3 percent.