On December 17, the U.S. Federal Reserve made a decision to cut its interest rate by a quarter point, marking its third rate cut so far this year. However, policymakers have adjusted their forecasts for the coming year, anticipating a slowdown in cuts due to inflation that remains stubborn.
Federal Reserve: Fewer Cuts than Expected by 2025
Wednesday‘s reduction brings the Federal’s benchmark rate to 4.3%, a level that reflects a shift from its previous aggressive hiking approach. However, the 19 members of the U.S. central bank’s monetary policy committee project only two quarter-point cuts in 2025, rather than the four cuts expected in the September estimate.
This adjustment toward a more gradual reduction could mean that consumers will not see significantly lower rates on mortgages, auto loans or credit cards next year.
Fighting Inflation Remains the Main Challenge
Despite efforts to cut rates, inflation in the US remains a persistent challenge. In October, annual inflation stood at 2.8%, unchanged from March, and still above the Federal’s 2% target. This scenario, along with continued economic growth, has raised concerns about potential side effects of rate cuts, such as a resurgence of inflation.
Fed officials have indicated that their interest rate is approaching what they consider to be a “neutral” level, where they are neither seeking to stimulate nor slow the economy. This approach is essential to achieve a balance between controlling inflation and boosting economic growth without generating a slowdown that would lead to recession.
Uncertainty Due to Trump’s Economic Policies
Economic uncertainty is also influenced by the proposals of President-elect Donald Trump, who proposed tax cuts and modifications to immigration and trade policies. While these measures could boost growth, there is also a risk that they could further boost inflation, complicating the outlook for the Fed.
Federal officials cautioned that they will not be able to fully assess how these policies will affect growth until there is more clarity on their implementation.
Amid this climate of economic uncertainty, Federal policymakers continue to take a cautious approach. As Subadra Rajappa, head of rates strategy at Societe Generale, noted, “this will be a work in progress as things evolve,” reflecting the complexity of the current scenario.
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