Slower progress on inflation leads to a slower pace of rate cuts, especially as economic growth is brisk.

The US Federal Reserve cut interest rates but signaled it would slow the rate at which borrowing costs fall further, given a relatively stable unemployment rate and little recent improvement in inflation.

"Economic activity continued to expand at a solid pace with the unemployment rate "remaining low" and inflation "remaining 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 evaluate incoming data, the evolving outlook and the balance of risks," it said in new language setting up a likely pause to begin rate cuts at the January 28-29 meeting.

US central bankers now predict they will make just two quarter percentage point rate cuts by the end of 2025.

That's half a percentage point less in policy easing next year than officials had expected 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.

"From this point forward, it is appropriate to move forward cautiously and look at progress on inflation ... as of right now, we are in a place where the risks are in balance," Fed Chairman Jerome Powell said at 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 does not return to the 2 percent target until 2027, translates into a slower pace of rate cuts.

Fed officials also raised their estimate of the long-term neutral interest rate -- the level thought to neither spur nor hinder the economy -- to 3 percent.

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

"While the Fed chose to end the year with a third straight rate cut, its New Year's resolution appears to be for a more gradual pace of easing," said Whitney Watson, global co-head and co-investment officer of fixed income and liquidity solutions for Goldman Sachs Asset Management. Watson added that "we expect the Fed to choose to skip a January rate cut, before resuming its easing cycle in March."

Trump uncertainty

The new policy rate is now a percentage point below the peak reached in September when officials concluded inflation was reliably on its way back to the 2 percent target and that there were risks to the labor market from tightening monetary policy for too long to keep

However, key measures of inflation since then 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 estimates are the first since President-elect Donald Trump's election victory on Nov. 5, which injected a new level of uncertainty into the economic outlook given his campaign promises for tax cuts, tariff increases and a crackdown on unauthorized immigration – aspects of what analysts see as inflationary.

Trump does not take office until Jan. 20, and Fed officials have said they cannot base monetary policy on campaign proposals that may or may not be enacted.

Still, Fed staff likely exercised different scenarios, and policymakers' projections show growth next year remaining above potential at 2.1 percent, inflation remaining above target for two more years, and the unemployment rate never rising above 4.3 percent.