US Federal Reserve Cuts Interest Rate Again Amid Inflation Concerns
On Wednesday, the US Federal Reserve made a notable decision by reducing the key interest rate for the third consecutive time, as many economists had anticipated. The rate cut, albeit modest, was by 0.25 percentage points, bringing the key interest rate down to a range of 4.25 to 4.5 percent. This adjustment allows commercial banks in the US easier access to loans from the central bank.
The primary objective of the Fed is to keep inflation in check. Recent reports indicate that inflation has shown some signs of strengthening, particularly in November, where consumer prices rose by 2.7 percent compared to the same month last year, a slight increase from the previous month’s 2.6 percent rate. The Fed aims for a medium-term inflation target of around two percent, a rate that is also aligned with the goals of the European Central Bank (ECB).
Similar actions have been observed in Europe, where there have also been four interest rate reductions this year, culminating in the latest decrease last week. Although inflation in both the US and the Eurozone is gradually retreating, experts caution that it is not entirely eradicated. Fed Chairman Jerome Powell commented after the central bank’s November meeting that the expectation is for inflation to stabilize around the two percent target in the coming months. This is a significant change from the summer of 2022, when inflation had soared above nine percent, primarily due to the energy crisis that followed the Russian invasion of Ukraine.
Looking ahead, analysts predict a cautious approach by the Fed regarding further rate cuts in the upcoming year, which is influenced by the potential return of Donald Trump to the White House. Economists warn that Trump's proposed economic policies, including extensive tariffs, could exacerbate inflation, thereby constraining the Fed's ability to lower rates further. High interest rates generally tend to dampen consumer and business demand since higher loan costs can stifle economic growth. The ideal outcome is a decrease in the inflation rate, which allows for a more favorable economic environment.
The Fed's current projection for the average key interest rate for the next year sits at around 3.4 percent. In a statement made after Trump’s recent presidential election victory, Powell indicated that upcoming elections would not influence the Fed's policy decisions. Despite the Fed's independence from government control, Trump's past relationship with the central bank, characterized by tension and public criticism, suggests that he may seek to influence future rate cuts during a prospective second term. Notably, Powell, who was appointed by Trump in 2018, has indicated no plans to resign before his term ends in 2026, despite Trump's indications that he would prefer a different appointee for the role of Fed Chair in the future.
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