The US Federal Reserve cut its key interest rate by 0.25 percent yesterday to 4.25-4.50 percent. This widely anticipated decision was reached when the six policymakers approved the decision by a vote of 11 to 1.
Nevertheless, the announcement also warned of further slowing down of future rate cuts and led to a steep drop in the value of shares in the financial market.
The Fed also cut the forecast for the number of quarter-point rate cuts in 2025 in half to two from four. This shift lowered investors’ moods as all leading Wall Street benchmarks ended in the red.
Yields on the 10-year US Treasury also advanced signaling that investors could be bracing for potential sustained rate rises in the coming year or two.
Powell agreed that inflation had moderated but still remained at a level higher than the Fed’s target of 2%. In an interview with reporters, Powell said he was confident regarding the condition of the US economy, revealing that the Fed was much nearer to the final stage in its current cycle regarding rate setting.
This is the last rate decision before Biden’s administration transmits the baton to Joe Biden who is the president-elect at this time Kamala Harris, a Democratic Senator.
Proposed economics by Trump such as tariffs increase and immigration cuts were criticized as to the outcome that they will have to growth and inflation. The Congressional Budget Office stated that new tariffs negatively impact economic expansion and would add the pressure of inflation.
Inflation Concerns Persist
Nevertheless, the central bank has only recently been able to keep inflation in check through rate increases over the past two years. Thus, inflation rates have recently started to inch up again and moved away from the Fed’s desired 2-percent range.
Fiscal policies and monetary policies on their part have led the FOMC to be very cautious about further rate cuts.
Analysts have warned that only when adjustment successively proves beneficial to inflation, will further rate cuts be made. Diane Swonk of KPMG said that the FED would need confidence in this direction to act further.
Revised Economic Forecasts
The Fed made its rate decision with a new set of economic projections, which was somewhat less aggressive on rate cuts. The FOMC now expects only two reductions of 25 basis points in 2025.
Furthermore, expectations about near-term inflation have been increased: core inflation is expected to reach 2.5% in the year 2025 and remain higher than the target in the following years up to 2027.
On a brighter note, the Fed also lifted its real GDP growth estimate for the US economy from earlier projections to 2.5% this year and 2.1% in 2025.
Specifically, the unemployment rate is predicted to keep a level, somewhat less than in the previous forecast for 2024, and then increase slightly to 4.3 percent in 2025.
However, some forecasters think that such estimates can be somewhat overstated. The high unemployment level could lead to the Fed increasing the rate cut pace more than expected, according to Samuel Tombs, chief US economist at Pantheon Macroeconomics.
Macroeconomic objective of managing growth and inflation Rates
The Federal Reserve’s latest rate decision gives proof of the thin line that it has to tread in order to spur growth while at the same time, not to let inflation get out of hand.
Albeit, keenness still prevails among the policymakers to strictly avoid a premature cut in the rates, key data of the economy are still observed closely in order to set the course for action.
At the moment the Fed remains cautiously optimistic about the ability of the American economy and at the same time wary of inflation threats. The impact of these factors in monetary policy will most probably be clearer in the coming months.
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