Washington (AFP) – The US Federal Reserve cut interest rates by a quarter point Wednesday and signaled a slower pace of cuts ahead, as uncertainty grows over inflation and President-elect Donald Trump’s economic plans. Policymakers voted 11-to-1 to lower the central bank’s key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement. This is the final planned interest rate decision before outgoing Democratic President Joe Biden makes way for Republican Donald Trump, whose economic proposals include tariff hikes and the mass deportation of millions of undocumented workers.
These policies, combined with the recent uptick in inflation data, led some analysts to pare back the number of rate cuts they expect in 2025 ahead of Wednesday’s meeting, predicting that interest rates will need to remain higher for longer. While inflation has “eased significantly,” the level remains “somewhat elevated” compared to the Fed’s long-term target of two percent, Chair Jerome Powell said Wednesday. He added that the Fed was now “significantly closer” to the end of its current easing cycle.
In updated economic forecasts published alongside the rate decision, members of the Fed’s rate-setting committee penciled in just two quarter-point rate cuts in 2025, down from an earlier prediction of four, and hiked their headline inflation outlook for next year, from 2.1 percent to 2.5 percent. The Fed has made progress tackling inflation through interest rate hikes in the last two years and recently began paring back rates to boost demand in the economy and support the labor market. But in the last couple of months, the Fed’s favored inflation measure has ticked higher, moving away from the bank’s target, and raising concerns that the US central bank’s battle is not over.
“I’m dubious that another cut is necessary,” Citigroup global chief economist Nathan Sheets told AFP ahead of the meeting.
The 19-member committee’s median forecast for headline inflation in 2025 rose sharply in 2025 to 2.5 percent, up from 2.1 percent in September. The growth outlook for this year also rose, climbing to 2.5 percent before cooling to 2.1 percent in 2025, up slightly from September. The unemployment rate is expected to be slightly lower than previously expected this year at 4.2 percent, and to then tick up slightly to 4.3 percent in 2025 and 2026.
But some analysts think policymakers’ projections for unemployment are overly optimistic. “Rate cuts will come faster than the Fed expects, as unemployment tops the new forecast,” Pantheon Macroeconomics chief US economist Samuel Tombs wrote in a note to clients published after the decision. Futures traders see a roughly 90 percent chance that the Fed will pause rate cuts next month and a probability of close to 60 percent that it will make no more than one cut in the whole of 2025, according to CME Group data.
© 2024 AFP
