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US Federal Reserve Cuts Interest Rates but Signals Slower Easing Ahead

Source: economictimes.indiatimes.com

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Fed Maintains Caution Amid Economic Stability

The United States Federal Reserve announced a Fed rate cut while signaling a more cautious approach to future reductions. The decision reflects stable economic conditions, with unemployment remaining low and inflation showing limited improvement. In its latest policy statement, the Federal Open Market Committee (FOMC) stated that “economic activity has continued to expand at a solid pace,” and inflation “remains somewhat elevated.”

This marked slowdown in rate cuts was underscored by new language in the FOMC’s statement, indicating that future adjustments will hinge on incoming data and risk assessments. Federal Reserve Chair Jerome Powell emphasized this cautious approach during a news conference, noting that risks to inflation and economic growth are now more balanced. The Fed’s projections now suggest only two quarter-percentage-point rate reductions through 2025, a more conservative stance than previously anticipated.

The central bank also adjusted its outlook for inflation, projecting a rise to 2.5% in the first year of the new administration, significantly above its 2% target. This inflationary pressure, paired with stable unemployment, signals a slower path to reaching the Fed’s goals. The latest reduction in the benchmark policy rate to a range of 4.25% to 4.5% reflects these concerns.

Rate Cuts Reflect Inflation and Growth Challenges

The Fed’s decision to moderate its rate-cutting pace is tied to slower-than-expected progress on inflation. Projections indicate that inflation is unlikely to return to the 2% target until 2027. This sluggish progress has prompted the Fed to reassess its long-run neutral rate of interest, raising it to 3%. The Fed rate cut represents a level that neither stimulates nor restricts economic activity.

Despite the rate cut, Federal Reserve Bank of Cleveland President Beth Hammack voted against the decision, favoring no change in policy rates. Analysts, such as Whitney Watson of Goldman Sachs Asset Management, anticipate a pause in January’s easing cycle before resuming in March, signaling the Fed’s commitment to gradual policy adjustments.

Powell described the latest Fed rate cut as a “closer call,” indicating that higher-than-expected inflation in 2024 was a critical factor in slowing the pace of cuts. The Fed’s projections also show continued economic growth above potential, with unemployment unlikely to rise significantly. However, some uncertainty remains as policymakers weigh the risks of premature or excessive easing.

Trump Administration Brings New Uncertainties

The Fed’s latest policy projections arrive in the context of a changing political landscape. With President-elect Donald Trump’s upcoming inauguration, uncertainty looms over potential economic policies, including tax cuts, tariff hikes, and immigration reforms. These proposals, if enacted, could introduce inflationary pressures, complicating the Fed’s policy decisions.

While Trump’s administration doesn’t take office until January 20, the Fed remains cautious about adjusting monetary policy based on speculative policy changes. However, internal discussions likely include scenarios reflecting the new administration’s possible impact on growth and inflation. Current projections suggest that growth will stay above potential at 2.1% in 2024, inflation will exceed the target for two more years, and unemployment will remain low at 4.3%.

The Federal Reserve’s decision to balance the Fed rate cut with economic stability highlights the complexities of navigating an evolving economic and political landscape. As Powell stated, the focus remains on ensuring that inflation trends align with long-term goals while safeguarding economic growth and employment stability.

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