The US Federal Reserve cut interest rates by a quarter point on Wednesday and signaled a slow pace of further cuts, triggering a sharp selloff in financial markets.
Policymakers voted 11-to-1 to cut the central bank’s key lending rate to between 4.25 percent and 4.50 percent, as expected, the Fed announced in a statement.
But he reduced the number of quarter-point cuts expected next year from an average of four in September to just two on Wednesday, surprising the market.
All three major indexes on Wall Street closed firmly lower, while yields on US Treasuries rose as traders digested the prospect of higher interest rates over the next few years.
Chairman Jerome Powell told reporters on Wednesday that although inflation has declined “significantly,” its level remains “somewhat elevated” compared to the Fed’s long-term target of two percent.
He said he is “very optimistic” about the state of the US economy, adding that the Fed is now “very close” to the end of its current easing cycle.
It was the last planned rate decision by outgoing Democratic President Joe Biden before making way for Republican Donald Trump, whose economic proposals include tariff hikes and the mass deportation of millions of undocumented workers.
The non-partisan Congressional Budget Office (CBO) estimates that imposing new tariffs will reduce economic growth and increase inflation.
Following Trump’s victory in the November election, some analysts had already reduced the number of rate cuts expected in 2025, warning that the Fed could be forced to keep rates high for longer.
The fight against inflation is not over
The Fed has made progress in tackling inflation by raising interest rates over the past two years without causing any blow to growth or unemployment, and more recently by cutting rates to boost demand in the economy and support the labor market. Has started.
But in the past months, the Fed’s preferred inflation measure has drifted away from the bank’s target and worries have grown that the inflation fight is far from over.
Members of the Fed’s rate-setting Federal Open Market Committee (FOMC) now “need to see additional improvement in inflation to continue cutting rates – complete,” KPMG chief economist Diane Swonk wrote in a note published after the decision. “Pause”.
high growth, high inflation
In updated economic forecasts published along with the rate decision, members of the 19-member FOMC plan to make only two quarter-point rate cuts in 2025, halving the number of cuts expected now.
They also raised their outlook for headline US inflation next year to 2.5 percent, and it is not expected to return to two percent before 2027.
In some good news for the world’s largest economy, FOMC members raised their outlook for growth to 2.5 percent this year and 2.1 percent in 2025.
Policymakers expect the unemployment rate this year to be slightly lower than a previously estimated 4.2 percent, before rising to 4.3 percent in 2025 and 2026 — at least one analyst said the figure was overly optimistic.
“The Fed will cut rates faster than expected as unemployment tops new forecast,” Samuel Toombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note to clients published after the decision.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
