Today, the US Federal Bank (Fed) announced a 25 basis point cut in interest rates, as widely expected by analysts, in the range of 4.25%-4.5%. It is noted that this is the third consecutive reduction in interest rates. On the occasion of the last meeting of the year, the Fed revised its macroeconomic forecasts for 2025, speaking of growth of the US economy by 2.1%. However, he stressed that he does not expect US inflation to fall below the 2% target before the end of 2026.

In a move widely expected by markets, the Federal Open Market Committee (FOMC) cut interest rates to the level they were at in December 2022, when interest rates were on the rise.

While there wasn’t much intrigue about the rate decision itself, the main question was what signal the Fed would send about its future intentions as inflation remains firmly above target and economic growth is fairly solid, conditions which usually do not coincide with an easing of policy

With the 25 basis point cut, the Fed indicated it will likely cut rates only twice more in 2025, according to forecasts.

For the second straight meeting, a member of the FOMC disagreed: Cleveland Fed President Beth Hammock wanted the Fed to keep interest rates at their previous level. Governor Michelle Bowman voted no in November, the first time a governor has voted against a decision since 2005.

The cut came despite the committee raising its forecast for full-year GDP growth to 2.5%, half a percentage point higher than in September. However, in the coming years officials expect GDP to slow to their long-term forecast of 1.8%.

Other changes in economic forecasts saw the committee cut its expected unemployment rate this year to 4.2%, while headline and structural inflation according to the Fed’s preferred measure were also pushed higher to respective estimates of 2.4% and 2.8%. , slightly higher than the September estimate and above the Fed’s 2% inflation target.

The FOMC decision comes with inflation not only remaining above the Fed’s target, but also while the economy is projected by the Atlanta Fed to grow at a rate of 3.2% in the fourth quarter and the unemployment rate is hovering around 4% .

While those conditions would be more compatible with the Fed raising or holding rates, officials are wary of keeping rates too high and the risk of an unnecessary economic slowdown. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had picked up only “slightly” in recent weeks, with signs of easing inflation and slowing hiring.

Fed Chairman Jerome Powell has said the interest rate cuts are an effort to readjust policy as it does not need to be so restrictive under current circumstances.

With today’s move, the Fed has cut interest rates by a full percentage point since September, a month in which it took the unusual step of a half-point cut. The Fed generally likes to move up or down in smaller steps of the size of 25 basis points as it assesses the impact of its actions.

ECB

It is recalled that last Thursday the European Central Bank cut interest rates down 25 basis points to 3%, according to estimates, the fourth straight cut this year by the same level.

Thus, the interest rates of the deposit facility, the main refinancing operations and the marginal financing facility were reduced to 3.00%, 3.15% and 3.40% respectively, with effect from 18 December 2024.