US Federal Reserve lowers interest rates as inflation cools
On Thursday the Federal Reserve took a big action lowering interest rates by a quarter percentage point, so narrowing the main rate to a range of 4.50%-4.75%.
Policymakers noticed the U.S. labor market which has "generally eased" and inflation has moved toward the Fed's 2% target, so guiding this decision, The action complements the continuous efforts of the central bank to boost economic growth and preserve its aims of inflation management.
Following a two-day policy meeting convened by the Federal Open Market Committee (FOMC), where it was generally expected the central bank would change rates, the rate cut follows. In its official statement, the FOMC observed that although labor market conditions show indications of slowing, economic activity in the nation keeps expanding at a steady rate, The committee noted that job creation has slowed, indicating a softening of the labor market even with the low unemployment rate.
This rate drop marks a change in Fed policy as officials claim that the hazards to the employment market and inflation seem to be balanced, From the last meeting, which concentrated on declining monthly job growth, the language in the statement was changed to reflect a more general recognition of improving labor market conditions, This implies that even if the labor market is still healthy, there are indications of a minor slowing down in employment growth and hiring.
Though the Fed admitted that price pressures were over the target level, inflation has followed its trajectory toward the target of 2%. Running at roughly 2.6% yearly as of September, the personal consumption expenditures (PCE) price index has stayed rather constant excluding food and energy. In the most recent statement, the Fed changed its inflation description to reflect that, in comparison to its prior phrasing of "further progress," inflation has "made progress" towards the target.
Declining interest rates also coincide with a period of uncertainty on the forthcoming political changes in the United States following the election of Republican President-elect Donald Trump. After beating Democratic Vice President Kamala Harris to win the presidential contest, Trump ran on pledges that might have a big effect on the American economy, These include possible levies on imports and stricter immigration laws, which would provide further difficulties for the Federal Reserve in controlling economic development and inflation.
Appointed by Trump during his first term, Jerome Powell, the Fed's head will attend a press conference to clarify the rate cut decision and offer analysis of the central bank's economic perspective, Given the political environment, Powell's remarks will probably be closely examined particularly as investors rethink their expectations for future rate reduction in response to Trump's victory.
The way the market responded to Trump's election triumph already caused investors to change their projections about the speed of next rate reductions. Many had first expected the Fed would keep aggressively lowering rates, but given the political environment, market players are now modifying their expectations on how much farther the central bank may slash rates without aggravating inflationary pressures.
The decision of the Federal Reserve to cut interest rates reveals a conscious balancing act between management of inflation and boost of the economy. While inflation shows signs of recovery, the slowing down of the labor market causes challenges. Especially as President-elect Trump gets ready to take office, the course of U.S. monetary policy will most likely be influenced by both domestic economic conditions and the shifting political environment.