Fed cuts interest rates by 0.25%

On December 18, the Fed decided to continue loosening monetary policy. Accordingly, the US reference interest rate is 4.25-4.5%, which is a decrease of 25 basis points (0.25%). This is the third consecutive time this agency has reduced interest rates. The previous two times, the reductions were 0.5% and 0.25%, respectively.

“Economic activity continues to grow steadily. Unemployment is low and inflation is moderate,” the Federal Open Market Committee (FOMC) of the Fed commented in the announcement. They said they will carefully consider upcoming data, both in terms of prospects and risks, to make interest rate decisions.

This raises suspicions that the Fed will stop reducing interest rates at the meeting at the end of January 2025. Next year, Fed officials expect to lower interest rates only twice, each time by 25 basis points. They also raised their inflation forecast for Donald Trump’s first year as US President from 2.1% to 2.5%. This rate is higher than the Fed’s 2% target.

The slow cooling of inflation is causing the Fed to reduce the pace of monetary easing. Interest rates in 2027 may only be 3.1%, instead of 2.9% as forecast in September.

After the Fed’s adjustment, the US stock market immediately turned down sharply. The S&P 500 is down 0.6%, the DJIA is down 0.54% and the Nasdaq Composite is down 0.68%.

World gold prices also plummeted. Each ounce lost 20 USD in just 10 minutes, about 2,617 USD.

The Fed’s reference rate applies to interbank overnight loans. This is not the level consumers and businesses have to pay, but the Fed’s move affects lending and savings interest rates.

When interest rates are low, borrowing costs are cheaper, businesses can invest in new projects or hire more employees. Similarly, consumers spend more because savings are less attractive.

However, economists believe that it will take at least a year for the impact of this adjustment to be evident in the economy. This explains why interest rates in the US increased from the beginning of 2022, but a year later inflation began to cool down.

Over the past year and a half, the Fed has raised interest rates 11 times to curb inflation.

Ha Thu (theo Reuters)