Federal Reserve Cautions on Future Rate Cuts
US stocks dropped sharply as the Federal Reserve signaled a slower pace of rate cuts next year. The central bank cut interest rates for the third consecutive time but emphasized caution regarding future reductions.
The Federal Reserve set its key lending rate at 4.25% to 4.5%, a full percentage point lower since September. The rate cuts aimed to stabilize prices and avoid economic slowdown. Despite these efforts, inflation concerns remain a significant challenge.
Reports indicate job growth has been stronger than expected, while price increases persist. Federal Reserve Chairman Jerome Powell warned that this dynamic could limit further rate cuts. “We are in a new phase of the process,” Powell stated. He emphasized a cautious approach to inflation control.
The Dow Jones Industrial Average dropped 2.58%, marking its longest losing streak since 1974. The S&P 500 fell nearly 3%, while the Nasdaq Composite declined 3.6%. Markets in Asia followed suit, with Japan’s Nikkei 225 falling 1.2% and Hong Kong’s Hang Seng index down 1.1%.
Inflation and Market Reactions
Inflation, a key driver of Federal Reserve policy, reached 2.7% in November, defying expectations for stabilization. Analysts have flagged policies proposed by President-elect Donald Trump, like tax cuts and import tariffs, as potential inflation drivers.
Lower borrowing costs encourage credit use, which can increase demand and, in turn, prices. This dynamic makes controlling inflation more challenging. Jerome Powell defended the latest rate cut, citing job market cooling over the last two years. However, he admitted this decision was a “closer call” due to White House policy uncertainty.
Olu Sonola, head of US economic research at Fitch Ratings, described the move as a “pause” on rate cuts. He noted that while growth and the labor market remain strong, inflation risks are growing. “The economy looks strong… What’s the rush?” remarked John Ryding, chief economic advisor at Brean Capital. He warned that rapid cuts could reverse progress on inflation control.
The Federal Reserve’s new forecasts project the key lending rate at 3.9% by the end of 2025, higher than the 3.4% forecast three months ago. Inflation expectations for 2025 rose to 2.5%, exceeding the 2% target.
Comparisons with Bank of England Policy
The Bank of England faces similar inflation challenges but has chosen a different approach. It is expected to hold its benchmark rate steady at 4.75%, as inflationary pressures in the UK remain high. Monica George Michail, associate economist at the National Institute of Economic and Social Research, highlighted wage growth and service price increases as key drivers of inflation in the UK.
The Bank of England’s response contrasts with the Federal Reserve’s strategy. Unlike the Fed, the Bank of England’s mandate does not require consideration of unemployment. This allows it to focus more on inflation control. John Ryding emphasized that the Bank of England’s approach appears more prudent than the Fed’s current policy.
As the Federal Reserve takes a cautious stance, global markets are adjusting to the implications of slower rate cuts. The economic outlook remains uncertain as inflation, employment, and fiscal policy continue to influence central bank decisions.