The American monetary authorities are loosening their monetary policy for the third time in a row. However, stubborn inflation is likely to force them to take their foot off the gas in the next few months.
The Fed leadership around central bank chief Jerome Powell has decided to cut interest rates for the third time in a row.
Mark Schiefelbein / AP
The hard march continues, and it won’t stop until 2025. On Wednesday, in its last monetary policy decision of the year, the US Federal Reserve lowered the key interest rate again by 0.25 percentage points. From now on it will range between 4.25 and 4.5 percent.
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The decision will lead to lower interest rates nationwide, for example for corporate loans or mortgages, and thus stimulate the American economy. The recession that market observers were still afraid of at the beginning of 2024 is becoming more distant.
Powell soon hits the brakes
It is no surprise that the central bank is easing its interest rate policy for the third time in a row. Statements from the top of the Fed in combination with the latest economic data already indicated this. Investors were all the more eager to see signals about how quickly and strongly the Fed would push down interest rates in the coming year.
These signals – both small changes in the wording of the Fed’s press release and the economic forecast from the 19 members of the Fed’s interest rate committee, which is updated quarterly – were pessimistic. In September, the monetary authorities expected four further interest rate cuts for 2025. Now they have significantly revised this estimate: the vast majority of the committee only expects two more cuts in the coming year.
The Fed leadership also expects slightly higher inflation and stronger economic growth than before. The financial markets must therefore prepare for the fact that the Fed will soon take a break and keep interest rates at a slightly higher level in the medium to long term than previously expected.
Fed Chairman Jerome Powell said at the press conference that the uncertainty about how inflation will develop argues for a more cautious approach. “It’s like walking into a dark room full of furniture: you walk slower.”
Both the stock and bond markets reacted to the Fed’s cautious message with losses.
Weak industry, robust consumption
For a long time, observers were unsure whether the Fed would cut interest rates again in December due to the economic conditions. The central bank is in a perpetual balancing act: if it keeps the key interest rate too high, it will provoke a recession.
The unemployment rate in the United States rose from 3.7 to 4.2 percent this year; Towards the end of the year, slightly fewer new jobs were created than in the first half of the year. In November, industrial production also fell for the third time in a row; This surprised analysts who had actually expected an increase after the end of the major strike at aircraft manufacturer Boeing.
Overall, the US economy is still making brisk progress: The Atlanta Fed’s widely respected real-time tracker currently estimates GDP growth at 3.2 percent; Americans’ wages also continue to rise significantly. With low interest rates in this environment, the risk that inflation will rise again increases. Inflation has declined sharply since 2022, when it reached a high 8 percent in the USA. However, it remains above the 2 percent target that the Fed has set itself; Among other things, because rents and house prices are still rising significantly.
The fact that the monetary policy decision was not unanimous shows that the American monetary authorities are faced with a tricky task; only for the second time this year. Beth Hammack, president of the Federal Reserve Bank of Cleveland, spoke out against the cut and would have kept interest rates at their current level.
It also became apparent that President-elect Trump is already keeping the Fed busy. Powell said some members of the rate-setting committee have incorporated the increased uncertainty that the incoming administration’s fiscal policies will bring into their thinking for 2025. Other members did not do this, and a third group did not comment on it.
It is expected that the USA under Trump could impose higher tariffs on imports, which, in the opinion of the vast majority of economists, will have a price-increasing effect. However, Powell reiterated that the Fed only reacts to the inflationary effects of political decisions after the politicians have made these decisions.
