WASHINGTON - The Federal Reserve on Wednesday cut its key interest rate by a quarter of a percentage point, the third cut in a row and one that came with a tone of caution about additional cuts in the coming years.

In a move widely anticipated by the markets, the Federal Open Market Committee cut the overnight lending rate to a target range of 4.25%-4.5%, back to the level where it was in December 2022 when rates were moving higher.

Although there was little intrigue about the decision itself, the main question was what the Fed would signal about its future intentions as inflation remains above target and economic growth is quite firm, conditions that usually do not coincide with the reduction of politics.

Read on what changed in the Fed statement.

In delivering the 25 basis point cut, the Fed indicated it would probably cut only twice more in 2025, according to the closely watched "dot plot" matrix of future interest rate expectations. individual members. The two cuts indicated a cut in the middle of the committee's intentions when the plot was last updated in September.

Assuming quarter-point increases, officials have indicated two more cuts in 2026 and another in 2027. In the longer term, the committee sees the "neutral" funds rate at 3%, 0.1 percentage point higher than the September update as the level has gradually moved higher this year.

"With today's action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive," President Jerome Powell he said in his post-meeting news conference. "We may therefore be more cautious as we consider further adjustments to our policy rate."

"Today was a closer call but we decided it was the right call," he added.

Stocks sold sharply after the Fed's announcement, with the Dow Jones Industrial Average closing more than 1,100 points while Treasury yields rose. Futures pricing has reduced the outlook for a slowdown in 2025, according to the CME Group's FedWatch measure.

"We moved pretty quickly to get here, and I think going forward we're obviously moving slower," Powell said.

For the second meeting in a row, one member of the FOMC did not decide: the President of the Fed of Cleveland Beth Hammack wanted the Fed to keep the previous rate. Gov. Michelle Bowman voted no in November, the first time a governor has voted against a rate decision since 2005.

The fed funds rate sets what banks charge each other for overnight loans but also influences a variety of consumer debt such as car loans, credit cards and mortgages.

The post-meeting statement was little changed except for a tweak regarding the "extent and timing" of further rate changes, a slight change in language from the November meeting. Goldman Sachs said the adjustment was "hinting at a slower pace of rate cuts ahead."

The reduction came despite the committee increasing its projection for the growth of the gross domestic product for the year 2024 to 2.5%, half a percentage point higher than September. However, in the following years officials expect GDP to decline to the long-term projection of 1.8%.

Other changes in the Summary of Economic Projections saw the committee cut its expected unemployment rate this year to 4.2%, while core and headline inflation according to the Fed's preferred measure were pushed higher to respective estimates of 2.4% and 2.8%, slightly higher than the September Estimate and above the Fed's 2% target.

The committee's decision comes with inflation not only holding above the central bank's target but also while the economy is projected by the Atlanta Fed to grow at a rate of 3.2% in the fourth ' quarter and the unemployment rate rose to around 4%.

Although those conditions would be most consistent with the Fed raising or keeping rates in place, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had increased only "slightly" in recent weeks, with signs of inflation slowing and hiring falling.

In addition, the Fed will have to deal with the impact of fiscal policy under the President-elect Donald Trumpwhich indicated plans for tariffs, tax cuts and mass deportations that could all be inflationary and complicate the central bank's work.

"We have to take our time, not rush and make a very careful assessment, but only when we have actually seen what the policies are and how they have been implemented," Powell said of Trump's plans. "We're just not at that stage."

Powell indicated that the reduction in rates is an effort to recalibrate the policy as it does not need to be so restrictive under current conditions.

"We think the economy is in (a) really good place. We think politics is in a really good place," he said Wednesday.

With Wednesday's move, the Fed will have cut benchmark rates by a full percentage point since September, a month during which it took the unusual step of cutting by half a point. The Fed generally likes to move up or down in smaller increments of a quarter point as it weighs the impact of its actions.

Despite the aggressive moves lower, the markets took an opposite direction.

Mortgage rates and Treasury yields both rose sharply during the period, possibly indicating that markets do not believe the Fed will be able to cut much further. The policy-sensitive 2-year Treasury yield jumped to 4.3%, putting it above the Fed's rate range.

In related action, the Fed adjusted the rate it pays on its overnight repo facility to the lower end of the fed funds rate. The so-called ON RPP rate is used as a floor for the funds rate, which has been moving towards the lower end of the target range.