Fed Cuts Funds Rate to A 4.25/4.50% Target and Guides to Slowing Cuts in 2025

As expected, the Federal Open Market Committee has ended its December 2024 meeting by cutting the Fed Funds rate by 25 basis points to a 4.25% to 4.50% target. The Fed's decision follows a 50 basis point cut in September and a 25 basis point cut in November. The Fed funds rate now stands a full percent below where it was just three months ago and where it had stood for most of 2024 (the Fed raised interest rates by 25 basis points in January for its final move of this cycle).

The December decision was not unanimous with Cleveland Fed President Beth Hammack voting against the move and preferring to keep rates steady. Hammack's dissent is indicative of an underlying unease with the pace of inflation remaining above the Fed's 2% target. Chairman Jerome Powell's statement indicated concern as well, guiding to only two cuts in 2025 (previous guidance had been for four). Powell also refused to rule out further rate hikes, saying: "You don't rule things completely in or out in this world." Monetary conditions may also need to remain tight as a precaution should tariffs and mass deportations result in dramatic changes in costs and labor conditions.

As a result, the 2-year Treasury rates quickly moved from around 4.23% to 4.35%.

It seems pretty clear - at least for now - that the era of very low interest rates that existed from 2008 to 2020 is gone. It also seems pretty clear that the era of inverted yield curves that existed since 2021 is also going to be leaving. With Treasuries of 2 years and longer now yielding more than short term Treasuries, those willing to tie up their cash for longer periods will begin to see a time premium. We expect to see banks begin to compete for deposits by offering 1-year CDs and 2-year CDs that offer a significant yield premium to online savings rates.