US cuts interest rates despite inflation risk

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The US central bank has cut interest rates for the third time, despite concerns the move would give a boost to the economy and risk reigniting inflation.

The decision was expected, setting the Federal Reserve's policy rate within a target range of 4.25% to 4.5%.

That represents a drop of one percentage point since September, when the bank began cutting borrowing costs, citing progress in stabilizing prices and a desire to avoid economic weakening.

Since then, reports indicate that the number of jobs created has been more resilient than expected, while price increases have continued to bubble.

Inflation, which measures the pace of price increases, stood at 2.7% in the United States in November, compared to 2.6% a month earlier.

Lower interest rates stimulate economic activity by making borrowing easier. This can encourage businesses to invest or expand and households to spend on goods such as cars. But if demand increases, prices usually increase.

Fed officials – who want inflation to be around 2% – have said they are aware of the risks.

“A Closer Call”

Bank President Jerome Powell defended the reduction on Wednesday, pointing to the cooling of the labor market over the past two years.

But he acknowledged the move was a “tighter decision” and warned that authorities would likely cut rates less next year.

“We are in a new phase of the process,” he said at a press conference. “From now on, it is appropriate to proceed with caution and wait for progress on inflation.”

Forecasts released by the Fed on Wednesday show that policymakers now expect the bank's key rate to fall to just 3.9% by the end of 2025, higher than the 3.4% forecast there. barely three months old.

They also forecast that inflation will remain higher next year than expected, at around 2.5%.

John Ryding, chief economic adviser at Brean Capital, said he thought it would have been wiser if the Fed had not made a taper at that meeting, even if it risked disrupting markets that were expecting to a reduction.

“Enormous progress has been made from peak inflation to where the United States is today and they are at risk of giving up on that progress, or even partially reversing it,” he said. “The economy looks strong…Why is there such a rush?”

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The move, which a Fed official formally opposed, is the central bank's last before President-elect Donald Trump takes office.

He won the election in November by promising to lower prices and interest rates.

But analysts have warned that his policies, including his plan to impose across-the-board tariffs on imports, could undermine those goals.

The Fed's announcement also comes a day before the Bank of England makes its latest decision on interest rates in the United Kingdom, where price inflation has risen recently.

It is widely expected to keep its key rate at 4.75%.

Monica George Michail, associate economist at the National Institute for Economic and Social Research, said the Bank of England faced higher rates of wage growth and service price rises than in the United States. .

Some of the government's plans, including raising the minimum wage, will also put pressure on inflation, she added.

“The Bank of England is trying to remain cautious,” she said.

But she warned that inflation risks were also present in the United States, pointing to Mr. Trump's tariff plans.

Mr Ryding said he believed the Bank of England – which, unlike the Fed, is not required to consider unemployment as part of its mandate – was responding more clearly to the reality of the situation facing she was confronted.

“The Bank [of England] is a more cautious central bank than the Fed is now,” he said.

In the United States, mortgage rates have actually risen since September, reflecting bets that borrowing costs will remain relatively high.

Olu Sonola, head of U.S. economic research at Fitch Ratings, said that despite Wednesday's cut, it appeared the Fed was signaling a “pause,” with questions about policies from the White House making it more uncertain about the path forward. follow.

“Growth is still good, the job market is still healthy, but inflationary storms are accumulating,” he said.

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