After the Federal Reserve dropped its third straight interest rate, US stock prices fell significantly; nonetheless, its economic forecasts indicated a slower rate of rate cuts in the next year. Though many were surprised by the central bank’s decision to lower borrowing rates, worries over the direction of monetary policy resulted in market losses.
How did the Fed's rate cut affect the stock market?
Lowering its benchmark lending rate to a target range of 4.25% to 4.5%, the Federal Reserve made a generally predicted action. Citing progress in stabilizing prices and a goal to prevent additional economic weakening, this marks a full percentage point drop from September, when the Fed started lowering borrowing costs.
The choice to lower interest rates is based on several studies showing labor market resiliency and employment numbers above projections. Still, inflation pressures have stayed constant, which complicates central bank decision-making.
Regarding following rate cuts, what did Federal Reserve Chairman Jerome Powell say?
Stocks in the US dropped significantly as Federal Reserve Chairman Jerome Powell issued a warning suggesting that fewer rate cuts could be anticipated next year despite the rate cut. “We are in a new phase of the process,” Powell remarked during a news conference. From this point forward, it’s appropriate to move carefully and look for progress on inflation.”
Powell’s remarks had instant effects. With its 10th consecutive session of declines—the longest run since 1974—the Dow Jones Industrial Average finished the day 2.58% below. The Nasdaq Composite dropped 3.6%; the S&P 500 fell about 3%.
Lowering its benchmark lending rate to a target range of 4.25% to 4.5%, the Federal Reserve made a generally predicted action. Citing progress in stabilizing prices and a goal to prevent additional economic weakening, this marks a full percentage point drop from September, when the Fed started lowering borrowing costs.
The choice to lower interest rates is based on several studies showing labor market resiliency and employment numbers above projections. Still, inflation pressures have stayed constant, which complicates central bank decision-making.
How did the announcement by the Fed affect global markets?
The Fed’s action and the unknown future rate decreases caused Asian markets to drop the next day. Early trading caused Hong Kong’s Hang Seng Index to drop 1.1% while Japan’s Nikkei 225 index fell 1.2%.
Still, a major worry is inflation, which gauges the rate of price rise. Rising to 2.7% in November, US inflation further strains the Federal Reserve as it tries to control the economy while juggling the conflicting hazards of inflation and expansion.
Might Trump's policies increase inflation pressure?
Though academics have cautioned that initiatives backed by President-elect Donald Trump—such as tax cuts and import tariffs—could aggravate inflationary pressures, inflation has proven to be recalcitrant. Analysts claim that reducing borrowing costs could aggravate already existing challenges by making credit more available and maybe boosting demand and driving up prices.
Economists have observed that “Lowering borrowing costs risks adding to inflationary pressure by encouraging borrowing and spending. ” If demand increases, higher prices usually follow.
Why did Powell defend the rate cut in the face of market losses?
Chairman Powell defended the decision to decrease the rate despite declining stock prices by pointing out the slowdown in the job market over the past two years. However, he agreed that this specific rate decrease was a “closer call” and pointed out the uncertainties about following economic policies as the White House changes.
“There is some doubt as the White House passes hands,” Powell remarked. “We have to proceed carefully going ahead.”
Is the Fed signaling a "pause" in upcoming rate cuts?
Certain observers think the Federal Reserve is signaling a “pause” in rate reductions. They pointed out that doubts about White House policies had clouded the Fed’s decision-making process.
One analyst stated, “Growth is still good, the labor market is still healthy, but inflationary storms are gathering; the Fed might be reluctant to keep lowering rates given the approaching inflation hazards.”
How will the Trump Administration benefit from the latest rate cut by the Fed?
The Federal Reserve’s penultimate action before President-elect Donald Trump takes office is a rate drop on Wednesday, the third in a sequence. Novelly winning the presidential contest, Trump promised to lower interest rates and prices. But since September, mortgage rates have increased, indicating that markets believe borrowing expenses will continue to be high.
Regarding interest rates, what do Fed projections for the future say?
The Fed’s revised predictions indicate that officials now see the primary lending rate declining to 3.9% by the end of 2025, somewhat higher than the 3.4% rate projected just three months ago. Furthermore, inflation is predicted to remain over the Fed’s 2% objective; estimates for next year show a pace of roughly 2.5%.
Why Do Certain Analysts Feel the Fed Reacted Too Fast?
Some analysts voiced worries about the Federal Reserve’s possibly hurried actions. Though it disappointed the markets, postponing the rate cut would have been wiser.
One observer remarked, “There has been tremendous progress made from the peak in inflation to where the US is now; it runs the danger of losing that progress.” “The state of the economy seems solid… Why is there a hurry?
How Should the Bank of England React to Growing Inflation?
The Fed’s statement arrived just one day before the Bank of England (BoE) decided on UK interest rates. Given rising inflation in the UK, the BoE is expected to keep its benchmark rate constant at 4.75%.
Experts observed that the Bank of England deals with inflationary pressures hotter than those of the US, particularly with regard to pay growth and service price hikes. They also mentioned government initiatives to increase the minimum pay, which could aggravate inflation further.
One analyst advised the Bank of England to remain wary. Still, they cautioned that given President Trump’s proposed tariffs, inflation hazards also still exist in the US.
Is the Bank of England approaching things more sensibly than the Fed?
Unlike the Fed, the Bank of England does not have to consider unemployment in determining its mandate. Certain analysts noted that the BoE seems to be reacting more sensibly to the present economic reality.
“The Bank of England is being more of a prudent central bank than the Fed is right now,” they added, noting the measured attitude of the BoE about the more aggressive rate-cutting posture of the Fed.
It remains to be seen whether additional interest rate reduction will occur and how legislators will negotiate the rough terrain ahead as the US and UK deal with the difficulties of controlling inflation and economic growth.
