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 US central bank’s key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement. The sole holdout, who supported keeping rates where they were, was Cleveland Fed President Beth Hammack.
In updated economic forecasts published alongside the 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 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 long-term target of two percent, and raising concerns that the US central bank’s battle is not over.
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 proposals, 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. “I’m dubious that another cut is necessary,” Citigroup global chief economist Nathan Sheets told AFP ahead of the meeting.
In September, Fed policymakers penciled in four additional quarter-point rate cuts next year. In updated economic forecasts published on Wednesday, they halved that number to just two. They also sharply raised the outlook for headline inflation to 2.5 percent, up from 2.1 percent in September, and hiked their growth outlook for this year to 2.5 percent, and then to 2.1 percent in 2025, up slightly from 2.0 percent in September.
One big challenge Fed chair Jerome Powell will face during the post-decision press conference on Wednesday is how to defend the Fed’s decision to make cuts given that the US economy and the labor market are both in relatively good health, while inflation has ticked higher recently. “We expect Powell will indicate that the Committee believed it was appropriate to continue the re-calibration of its monetary policy stance with another modest reduction,” economists at Deutsche Bank wrote in a recent investor note. “The Chair is likely to emphasize that the current policy stance leaves the Committee well placed to respond to risks in both directions.”
Another big task facing the Fed chair is how to deal with the prospect of potentially dramatic economic changes once Trump takes office on January 20. The Fed has a dual mandate from Congress to act independently to tackle inflation and unemployment. But it still has to deal with the implications of government policies on the broader economy. “I think it is possible — conceptually possible — to have a baseline that’s agnostic as to Trump’s policies,” said Sheets, from Citigroup. “And I think that that is the way that Powell is going to try to sell it.”
© 2024 AFP
