The US Federal Reserve has slashed interest rates by 0.25% on Wednesday, cutting the rates for the third time in a row, sidestepping concerns over inflation’s downward path and the potential impact of Donald Trump’s policy decisions.
The Fed has lowered the federal funds target rate range by 0.25% to between 4.25% and 4.5% and reduced the reverse repo rate to 4.25% from 4.55%, a 30-basis-point cut.
The US central bank said the recent indicators suggest that economic activity has continued to expand at a solid pace, while acknowledging that inflation remains somewhat elevated.
“Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the 2% objective but remains somewhat elevated,” the Fed said in a statement.
It said that the risks to achieving its employment and inflation goals are “roughly in balance”.
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In the last couple of months, US inflation has edged higher, which led to tempering expectations on the number of rate cuts in the next year.
For the upcoming rate trajectory, Fed’s forecast just two quarter-point rate cuts in 2025 as against an earlier expectations of four quarter-point reductions. The Central bank has also hiked their inflation outlook for next year, from 2.1% to 2.5%.
Analysts had already anticipated that Fed would signal a slower pace in interest rate cuts next year as inflation edged up in the recent past, which requires rates to remain higher for a bit longer.
For the future tweaks to interest rates, Fed said it will carefully assess incoming data, the evolving outlook, and the balance of risks. The Fed Committee is further prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the inflation target goals.
With the latest rate action, Fed has now cut rates by a full percentage point this year as it projected in September, when it began the easing cycle.
The current projections reveal that Fed sees the key lending rates in the 3.75-4% range by the end of 2025.
Also read: Inflation risks roughly balanced as rate cuts signal caution: Fed Chair Jerome Powell
The latest rate action by the Fed will be final policy move before Democratic President Joe Biden makes way for Republican Donald Trump, who touted some tougher economic proposals including tariff hikes.
The Fed has made significant progress tackling inflation through interest rate hikes in the last two years, and recently began paring rates back in a bid to boost demand in the economy and support the labor market.
