US Fed Interest Rate Cut by 0.25%, Markets React Sharply
US Fed Reduces Interest Rate Amid Market Volatility;Â A Quarter-Point Cut Amid Slower Future Adjustments:Â The US Federal Reserve has cut its key interest rate by 0.25%, bringing the rate range to between 4.25% and 4.50%. The move, widely expected, comes with a signal for a slower pace of cuts in the upcoming year. Policymakers have now revised their outlook for 2025, projecting just two quarter-point cuts instead of four, as anticipated in September.
This shift caught financial markets off guard, leading to a significant sell-off. Major Wall Street indices closed sharply lower, while US Treasury yields surged as investors adjusted to the prospect of higher rates persisting for longer.
Inflation Concerns and Economic Optimism
Fed Chair Jerome Powell acknowledged progress in addressing inflation, which has eased significantly. However, inflation remains “somewhat elevated,” still above the central bank’s long-term target of 2%. Powell expressed optimism about the US economy, noting that the Fed is closer to concluding its easing cycle.
Despite these measures, inflation has shown signs of ticking upward in recent months, raising concerns that the battle against rising prices is far from over. According to Powell, further reductions in rates will require tangible improvements in inflation metrics.
Revised Economic Projections
The Fed released updated economic forecasts alongside its rate decision. Members of the Federal Open Market Committee (FOMC) now anticipate inflation to reach 2.5% in 2025, delaying a return to the 2% target until 2027.
In contrast, there was some optimism in growth projections, with the US economy expected to expand by 2.5% in 2024 and 2.1% in 2025. Unemployment rates are projected to remain relatively stable, increasing slightly to 4.3% in the coming years.
Political and Economic Backdrop
This decision comes amid a political transition, with outgoing President Joe Biden set to hand over to President-elect Donald Trump. Trump’s proposed economic measures, including tariff hikes and mass deportation policies, could potentially influence inflation and growth.
Analysts have raised concerns that the Fed may need to maintain higher rates for longer, depending on the impact of these policies. The Congressional Budget Office has cautioned that additional tariffs could slow economic growth and further elevate inflation.
Market Implications
The Fed’s strategy reflects a careful balance between tackling inflation and sustaining economic growth. However, economists warn that rising unemployment may eventually accelerate rate cuts. Samuel Tombs, Chief Economist at Pantheon Macroeconomics, suggested that the Fed’s unemployment forecast might be overly optimistic, predicting faster rate cuts if joblessness surpasses expectations.
As the Fed navigates these challenges, its decisions will remain critical in shaping economic conditions and market responses in the months ahead.
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