Silke Mayr Fed Cautious on Rate Cuts Amid Inflation Concerns
US stocks fell sharply after the Federal Reserve announced a slower pace of rate cuts for 2024. The central bank reduced interest rates for the third consecutive time but hinted at a more cautious approach going forward.
The Federal Reserve set its key lending rate at a target range of 4.25% to 4.5%. This marks a one percentage point drop since September when rate cuts began. The bank cited progress on price stability and efforts to avoid economic weakening as reasons for the cuts.
Economic reports since then revealed job creation exceeded expectations, while inflationary pressures remained persistent. Federal Reserve Chairman Jerome Powell noted this shift, saying, “We are in a new phase of the process.” He added that moving forward, the bank would “move cautiously and look for progress on inflation.”
Market Reaction and Global Impact
The Dow Jones Industrial Average dropped 2.58%, marking its 10th consecutive daily decline, the longest since 1974. The S&P 500 fell nearly 3%, and the Nasdaq Composite dropped 3.6%. Asian markets also experienced declines, with Japan’s Nikkei 225 down 1.2% and Hong Kong’s Hang Seng falling 1.1%.
Inflation in the US rose to 2.7% in November, reflecting stubborn price pressures. Analysts noted that President-elect Donald Trump’s plans for tax cuts and import tariffs could increase inflation. Reducing borrowing costs could add to this by encouraging spending and borrowing.
Federal Reserve Chairman Powell defended the latest cut, pointing to signs of a cooling job market. He acknowledged, however, that this decision was a “closer call” than previous moves. With the White House transition, Powell said economic uncertainty was higher than usual.
Olu Sonola, head of US economic research at Fitch Ratings, interpreted the Fed’s actions as a signal of a potential “pause” in rate cuts. “Growth is still good, the labor market is still healthy, but inflationary storms are gathering,” he said.
Long-Term Projections and Global Central Bank Responses
The Federal Reserve’s projections now place its key lending rate at 3.9% by the end of 2025, higher than the 3.4% forecasted three months earlier. Policymakers expect inflation to remain at 2.5% next year, exceeding the Fed’s 2% target.
John Ryding, chief economic advisor at Brean Capital, suggested the Fed should have refrained from cutting rates. “There has been enormous progress from the peak in inflation to where the US is now,” he said. “The economy looks strong… What’s the rush?”
On Thursday, the Bank of England is set to announce its latest interest rate decision. Analysts expect it to keep rates steady at 4.75%. Monica George Michail, associate economist at the National Institute of Economic and Social Research, pointed out that wage growth and price increases in the UK remain higher than in the US. Planned increases to the minimum wage could further pressure UK inflation.
Unlike the Fed, the Bank of England is not required to consider unemployment when setting policy. John Ryding argued that the Bank of England is acting more prudently than the Federal Reserve in its approach to interest rates. “The Bank [of England] is being more of a prudent central bank than the Fed is right now,” he said.