The United States Federal Reserve reduces interest rates by 0.25 percentage units for the second time.
The US Federal Reserve, led by Chair Jerome Powell, has lowered its benchmark interest rate by 0.25 percentage points once again. Consequently, the rate now falls within the range of 4.25 to 4.5 percent, as shared by the Fed in Washington. This marks the third consecutive rate reduction.
As anticipated, the monetary policy rate was decreased by a quarter point, which aligns with widespread predictions. The Fed started its series of rate hikes in September, followed by another adjustment in November. Presently, the central bank has relaxed its monetary policy for the third instance in 2023. Some analysts forecast that the Fed will slow down future rate reductions in 2025.
The forthcoming US President, Donald Trump, has announced tariffs on imports, which could potentially escalate inflation levels. Led by Lena Drager from the Kiel Institute for World Economics (IfW), experts recommend that the Fed should hold off on additional rate cuts in forthcoming meetings to preserve its flexibility in the face of economic uncertainties. Drager highlighted that the environment is complex, with indications of rising inflation and ambiguous economic prospects.
The recent labor market statistics reveal that while the US employment sector is showing signs of cooling, it remains steadfast. November saw the addition of 227,000 jobs outside agriculture, except for certain disruptions due to hurricanes and strikes. The unemployment rate went up from 4.1 to 4.2 percent, and inflation increased to 2.7 percent in November, from 2.6 percent in October. The core rate, excluding costly energy and food items, remained at its steady 3.3 percent above the central bank's desired 2 percent threshold.
Bastian Hepperle of Hauck Aufhäuser Lampe Privatbank expects a total of 100 basis points in rate cuts for 2024. He added that if inflation continues to decline at the beginning of 2025, additional rate cuts are likely. However, he emphasized that it's too early to discuss a rate pause, stating that any potential economic and inflationary challenges could delay the break. The ultimate impact of the new US policies on inflation is still unknown, leading some experts to suggest pushing back the rate pause towards the summer season.
The decrease in interest rates by the Fed could indirectly impact the economy, potentially leading to stimulated economic growth. This move follows concerns about slowing economic growth and inflation pressures, as evident in the rising unemployment rate and inflation levels.
