US Cuts Interest Rates Again Despite Inflation Concerns
The Federal Reserve has lowered its benchmark interest rate for the third time, even as economists warn the move could fuel inflation. The rate now sits in a target range of 4.25% to 4.5%, a full percentage point drop since September, marking a significant shift in monetary policy aimed at stabilizing the economy.
The decision was widely anticipated, with Fed Chair Jerome Powell emphasizing caution moving forward. “We’re entering a new phase,” he stated during a press briefing. “It’s crucial to proceed carefully and monitor progress on inflation.”
Despite the Fed’s efforts, inflation remains stubborn, climbing to 2.7% in November. Additionally, the labor market has shown unexpected resilience, complicating the central bank’s balancing act between fostering economic growth and keeping price increases under control.
Market Reaction and Economic Implications
Following Powell’s remarks, U.S. stock markets tumbled. The Dow Jones dropped over 2.5%, while the S&P 500 and Nasdaq fell nearly 3% and 3.5%, respectively. Analysts interpreted the Fed’s decision as a signal that further rate cuts might be less frequent in the coming year.
Olu Sonola, head of U.S. economic research at Fitch Ratings, described the rate cut as a potential pause. “Growth remains solid, and the labor market is strong, but inflationary pressures are building,” he said.
The Fed’s updated forecasts now project the key interest rate to decline to 3.9% by the end of 2025, slightly higher than the 3.4% predicted in September. Policymakers also revised their inflation expectations for next year to 2.5%, remaining above their 2% target.
Concerns Over White House Policies
President-elect Donald Trump’s proposed economic policies, including significant tax cuts and import tariffs, have raised concerns about further inflationary pressure. Analysts worry that making borrowing cheaper could encourage excessive spending, driving demand and pushing prices higher.
Powell defended the Fed’s decision, citing a cooling job market over the past two years. However, he acknowledged uncertainty as the administration transitions. “This was a tougher decision,” he admitted, highlighting the risks of policy missteps.
Global Context and Comparisons
Across the Atlantic, the Bank of England is expected to keep its rates steady at 4.75% amid rising inflation in the UK. Monica George Michail, an economist at the National Institute of Economic and Social Research, noted that wage growth and service price increases are outpacing those in the U.S., adding that policies like higher minimum wages could exacerbate inflation pressures.
John Ryding, chief economic advisor at Brean Capital, criticized the Fed’s approach, suggesting a pause would have been prudent. “We’ve made significant progress in reducing inflation, and this decision risks undoing that progress,” he said.
As central banks grapple with complex economic challenges, the stakes are high. With inflationary risks looming, the Fed’s cautious tone underscores the delicate balancing act ahead.
