Fed Signals Caution on Rate Cuts
US stocks fell sharply after the Federal Reserve signaled a slower pace of interest rate cuts next year. The central bank reduced rates for the third consecutive time, setting the key lending rate between 4.25% and 4.5%. This move, widely anticipated by analysts, marked a one-percentage-point drop since September. At that time, the Fed aimed to stabilize prices and prevent economic slowdown.
Recent economic reports revealed stronger-than-expected job creation, while inflation continued rising. In response, Federal Reserve Chair Jerome Powell warned of fewer rate cuts in 2024. Speaking at a press conference, Powell stated, “It’s appropriate to move cautiously and look for progress on inflation.”
The market reaction was swift. The Dow Jones Industrial Average dropped 2.58%, extending its losing streak to ten consecutive sessions, the longest since 1974. The S&P 500 lost 3%, and the Nasdaq Composite fell 3.6%. Asian markets followed suit, with Japan’s Nikkei 225 and Hong Kong’s Hang Seng down 1.2% and 1.1%, respectively.
Inflation Concerns and Economic Uncertainty
US inflation rose to 2.7% in November, underscoring persistent price pressures. Analysts warned that President-elect Donald Trump’s proposed policies, like tax cuts and import tariffs, could fuel inflation further. Lower borrowing costs, while aimed at boosting spending, could also drive demand and raise prices.
Despite this, Powell defended the rate cut, highlighting job market cooling over the past two years. However, he admitted the decision was a “closer call” this time. Market watchers like Olu Sonola from Fitch Ratings believe the Fed’s move suggests a “pause” in cuts amid uncertainty over the incoming administration’s policies.
Forecasts from the Fed now project the key lending rate will drop to 3.9% by the end of 2025, compared to an earlier estimate of 3.4%. Inflation forecasts were also revised, with expectations of 2.5% for next year, exceeding the Fed’s 2% target.
Not all analysts supported the Fed’s move. John Ryding, chief economic advisor at Brean Capital, argued that the Fed should have maintained rates to preserve inflation-fighting progress. “The economy looks strong… What’s the rush?” Ryding remarked.
International Reactions and Broader Implications
The Bank of England faces a similar dilemma. It is expected to hold its benchmark rate steady at 4.75%, despite rising inflation. Monica George Michail from the National Institute of Economic and Social Research noted that UK wage growth and service price increases outpace those in the US. Government plans to raise the minimum wage could further fuel inflationary pressures.
Unlike the Federal Reserve, the Bank of England does not consider unemployment as part of its mandate. Analyst John Ryding argued that the Bank of England’s cautious approach demonstrates “more prudent central banking” compared to the Fed’s stance.
The Federal Reserve’s decision arrives amid global economic uncertainty, with central banks weighing inflation control against economic growth. Investors remain alert to shifts in interest rate policies as markets continue to react to central bank signals worldwide.
