The U.S. Federal Reserve cut its key interest rate by a quarter of a point on Wednesday, the third cut this year, but also signaled it expects to cut rates next year more slowly than previously thought, with inflation still well above the central bank's two percent. target

The Fed's 19 policymakers projected they will cut their benchmark rate by a quarter point just twice in 2025, down from their September estimate of four rate cuts. Its new projections suggest that consumers may not enjoy much lower rates next year for mortgages, auto loans, credit cards and other forms of borrowing.

Fed officials have stressed that they are slowing their rate cuts as their benchmark rate approaches a level that policymakers call "neutral," the level that is believed to neither stimulate nor hinder economy

Wednesday's projections suggest that policymakers may think they are not far from that level. Its benchmark rate stands at 4.3 percent after Wednesday's move, which followed a sharp half-point cut in September and a quarter-point cut last month.

"I think a slower pace of (rate) cuts really reflects both the higher inflation readings we've had this year and expectations that inflation will be higher" in 2025, Chairman Jerome Powell said at a conference in press

“We are closer to the neutral rate, which is another reason to be cautious about further moves.

"However," Powell said, "we still see ourselves on the verge of cutting."

Loonie slides in response to the cut

The Canadian dollar fell further against the US dollar, which continues to outperform other currencies, in reaction to Wednesday afternoon's cut.

"Jerome Powell was talking about a US economy that is clearly outperforming not only domestic expectations, but the rest of the world as well," said Karl Schamotta, chief market strategist at Corpy, a payments management firm in Toronto .

"That means US interest rates are high and that makes US markets the best place in the world to park money."

A number of other factors have driven the mild decline in recent months and years, including the end of a "supercycle" that led to strong demand for Canadian energy, as well as high household debt that curbed spending of consumers and Trump's threat of a 25 percent tariff. on Canadian products.

With that, "you essentially have a deadly cocktail for the Canadian dollar," Schamotta told CBC News. And the wolf could sink "at least a couple of cents lower" if Trump follows through on his threat.

This would severely affect the export sector. Schamotta said consumer sentiment in Canada would sink and businesses would pull back further on investment.

"All of this would mean that Canada would very likely fall into a recession."

However, Canadian exporters are hurt when the wolf underperforms against the U.S. dollar, Schamotta said. A lower correction could mean that some of these exports will "put themselves in a better position".

"They will be able to sell cheaper exports to the world, and they will be able to grow," he said. "This is a bit of a rebalancing process."

High inflation persists, the rate of hiring is cooling

The Fed's rate cuts this year marked a reversal after more than two years of high rates, which have largely helped control inflation but also made borrowing painful for consumers americans

But now, the Fed faces a variety of challenges as it seeks to complete a "soft landing" for the economy, in which high rates manage to curb inflation without triggering a recession. Chief among them is that inflation remains stubborn: According to the Fed's preferred gauge, annual "core" inflation, which excludes the most volatile categories, was 2.8 percent in October. This is still above the central bank's two percent target.

At the same time, the economy is growing rapidly, suggesting that higher rates haven't slowed it down much. As a result, some economists, and some Fed officials, have argued that borrowing rates should not be cut much further for fear of overheating the economy and reigniting inflation.

On the other hand, the pace of hiring has cooled significantly since 2024 began, a potential concern because one of the Fed's mandates is to achieve maximum employment.

"We don't think we need more cooling in the labor market to get inflation below two percent," Powell said at his news conference.

While still down at 4.2%, the unemployment rate has risen nearly a full percentage point in the past two years. Concerns about rising unemployment contributed to the Fed's decision in September to cut its key rate by half a point more than usual.

Trump's tariff threats increase uncertainty

On top of that, US President-elect Donald Trump has proposed a series of tax cuts and reduced regulations that could collectively spur growth. And his threatened tariffs and mass deportations could accelerate inflation.

Powell and other Fed officials have said they cannot assess how Trump's policies might affect the economy or their own rate decisions until more details are available. Until then, the outcome of the presidential election has mainly increased economic uncertainty.

This was underlined by the quarterly economic projections that the Fed issued on Wednesday.

Policymakers now expect headline inflation, as measured by their preferred gauge, to rise slightly from 2.3% now to 2.5% by the end of 2025.

Officials also expect the unemployment rate to rise by the end of next year, from 4.2 percent now to a still-low 4.3 percent.