US Fed cuts interest rates but warns next year | Business and Economic Affairs

Slower progress in deflation translates into a slower pace of deflation, especially as economic growth accelerates.

The United States Federal Reserve cut interest rates but signaled it would slow the pace at which borrowing costs fall anyway, given the steady unemployment rate and the recent slight improvement in inflation.

“Economic activity continued to expand at a robust pace” with the unemployment rate “remaining low” and inflation “remaining somewhat elevated,” the central bank's Federal Open Market Committee said in its latest policy statement on Wednesday.

“In considering the extent and timing of further adjustments to the target list … the Committee will carefully consider incoming data, the evolving outlook, and the balance of risks,” it said in new language that sets out a possible pause to reduce estimates from scratch. January 28-29 meeting.

US bankers now plan to cut rates by just two percentage points per quarter through the end of 2025.

That's less than half a percentage point in policy easing next year than officials had expected since September, with the Fed's projection for inflation in the first year of the new Trump administration jumping from 2.1 percent in their previous forecast to 2.5 percent now — well above the midpoint. the bank's target of 2 percent.

“From this point forward, it is appropriate to proceed cautiously and watch for progress in deflation … from now on, we are in a place where the risks are,” Fed Chairman Jerome Powell said at a press conference after the end of the central bank. a two-day policy meeting

Powell described the latest rate cut as a “close call” and noted that the slow pace of rate cuts projected next year indicates a higher reading for inflation in 2024.

Slow progress in inflation, which does not appear to return to the 2 percent target until 2027, translates into lower inflation.

Fed officials also raised their benchmark long-term interest rate – a rate that is thought not to stimulate or stifle the economy – to 3 percent.

The reduction of the policy rate to 4.25 percent to 4.5 percent was opposed by the president of the Federal Reserve Bank of Cleveland, Beth Hammack, who chose to leave the policy rate unchanged.

“While the Fed chose to end the year with its third consecutive rate cut, its New Year's resolution appears to be one of gradual easing,” said Whitney Watson, global head and chief investment officer of fixed income. liquidity solutions for Goldman Sachs Asset Management. Watson added that “we expect the Fed to choose to skip the January rate cut, before resuming its tapering cycle in March.”

Trump uncertainty

The new policy rate is now below the peak reached in September when officials concluded that inflation was on track to return to the 2 percent target and that there were risks in the labor market to keeping monetary policy tight for too long.

Key measures of inflation since then, however, have shifted significantly, while continued low unemployment and stronger-than-expected economic growth have fueled debate among policymakers about whether monetary policy is as tight as thought.

The latest quarterly projections are the first since President-elect Donald Trump's victory in the November 5 election, which has introduced a new level of uncertainty in the economic outlook given his campaign promises of tax cuts, tax increases and a crackdown on illegal immigration – elements of what analysts see as inflationary.

Trump won't take office until January 20, and Fed officials have said they won't base monetary policy on potential or potential campaign proposals.

Still, the Fed staff has likely been playing with different scenarios, and policymakers' projections show growth remaining above capacity at 2.1 percent next year, inflation remaining above target for two more years, and the unemployment rate never rising above 4.3 percent. .