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US Fed Reduces Interest Rate to 4.75%, Hints at Gradual Future Cuts
Last Updated: 8th November 2024 - 12:16 pm
The Federal Reserve announced on Thursday that it would be lowering its key interest rate by a quarter percentage point. This decision was widely expected as inflation approaches the central bank’s target of 2%. Consequently, the federal funds rate now stands at a range of 4.5% to 4.75%.
The US Federal Reserve opted to cut the benchmark interest rate by 25 basis points (bps) to 4.50% - 4.75%, aligning with Wall Street predictions, as policymakers noted a job market that has “generally eased” while inflation continues to trend toward the US central bank’s 2% target.
Read Nifty, Sensex Fall as US Election and Fed Meeting Loom
In its statement, the Fed recognized that inflation remains "somewhat elevated" and that unemployment has "increased but remains low." Furthermore, officials pointed out that labor market conditions have "generally eased," suggesting potential signs of a slowdown in hiring.
Some analysts noted that the Fed removed language from its earlier statements that expressed confidence in achieving the 2% inflation target. Omair Sharif, president of Inflation Insights, mentioned in a client note that this change could signal the Fed might hold off on another expected rate cut next month, stating, “If that is the case, then the Committee is likely closer to a pause.”
This suggests that the Fed may keep interest rates higher in the future.
With inflationary pressures from the past four years still present, there are concerns that President-elect Donald Trump's economic agenda, particularly his proposed tariffs, could lead to increased inflation.
Also read FOMC Meeting Kicks Off: US Fed Expected to Cut Policy
On Wednesday, Wall Street traders almost unanimously anticipated the Fed would lower the federal funds rate—an essential benchmark for other borrowing rates in the economy—by a quarter point. This reduction would help alleviate the restrictive lending environment previously established to manage the inflation surge that occurred during the pandemic.
With the upcoming presidential election, the Fed had reason to celebrate the return of inflation to its 2% goal. Unemployment also remains low at 4.1%, satisfying the Fed’s dual objective of managing inflation and unemployment.
Reaching these economic targets aligns with Trump's plan to introduce a new economic strategy. Analysts remain unsure about the specific results and potential effects of his proposals, yet markets have already begun selling bonds, anticipating increased inflation due to Trump's pro-growth and trade policies.
These developments might prompt the Fed to reconsider its current strategy of gradual rate cuts, which could conflict with Trump's goal of maintaining low interest rates as part of his economic growth plan.
"While Trump has consistently supported a more flexible monetary policy, we anticipate that the Fed will take a less aggressive stance on rate cuts if Trump is re-elected, given the inflationary pressures from new tariffs," analysts at Nomura Holdings mentioned in a client memo this fall.
Trump and other Republican leaders have rejected the notion that tariffs would lead to inflation, citing his previous success in imposing tariffs without causing inflationary spikes.
“In his first term, President Trump imposed tariffs on China, which helped create jobs, boost investment, and keep inflation in check,” stated Anna Kelly, a spokesperson for the Republican National Committee.
However, the new tariffs Trump has suggested—amounting to around $3 trillion—would be significantly broader than the $300 billion in targeted tariffs from his first term. Moreover, the current inflationary landscape is different: inflation during Trump's first term only briefly surpassed 2%.
David Seif, chief economist for developed markets at Nomura, pointed out that Fed Chair Jerome Powell may refrain from directly addressing how he expects his role to change with Trump's anticipated policies. Trump, who appointed Powell during his first term, has indicated a readiness to potentially challenge the long-standing principle of the Fed’s independence.
“I believe I have the right to suggest interest rate adjustments,” Trump remarked in a Bloomberg News interview at the Chicago Economic Club. Seif mentioned that while he may not have the power to mandate it, he can certainly share his thoughts on adjusting rates.
He elaborated that if Trump were to carry out his complete tariff plan, it could trigger a significant inflation spike. While this effect might not be permanent, it could force the Fed to reconsider its strategy of cutting rates.
At present, the economy seems to be growing steadily, but Seif cautioned that Trump’s policies could “add fuel to the fire,” possibly leading the Fed to take actions that Trump might not favor.
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