Michelle ThompsonUS stock prices dropped after the central bank cut interest rates for the third consecutive time, but its economic projections suggested a slower pace of rate cuts in the coming year.
The Federal Reserve reduced its key lending rate to a target range of 4.25% to 4.5%, marking a full percentage point drop since September. The decision followed progress in stabilizing prices and efforts to avoid economic weakening. However, recent reports showed stronger-than-expected job growth, while inflation continued to rise. Stocks fell sharply as Federal Reserve Chairman Jerome Powell warned that this could lead to fewer rate cuts than anticipated next year.
The Dow Jones Industrial Average fell by 2.58%, marking its 10th consecutive decline and the longest streak of daily losses since 1974. The S&P 500 dropped nearly 3%, while the Nasdaq Composite fell 3.6%. In Asia, Japan’s Nikkei 225 and Hong Kong’s Hang Seng both saw losses.
Inflation in the US rose to 2.7% in November, with concerns that policies proposed by president-elect Donald Trump, such as tax cuts and import tariffs, could drive prices higher. Analysts warn that lowering borrowing costs could exacerbate inflation by encouraging more spending and credit use, which typically leads to higher prices.
Powell defended the rate cut, citing cooling in the job market, but acknowledged uncertainty as the White House transitions. Analysts, including Olu Sonola from Fitch Ratings, noted that the Fed might be signaling a pause in rate cuts due to uncertainties about future policies. Despite strong economic growth, inflationary pressures are building.
The Fed’s forecast shows the key lending rate could fall to 3.9% by the end of 2025, higher than the previous estimate of 3.4%. They also expect inflation to remain above the 2% target, at around 2.5%, next year.
John Ryding, chief economist at Brean Capital, argued that the Fed should have delayed the rate cut, suggesting that the economy is strong and that further rate cuts could undo progress made in reducing inflation.
The Federal Reserve’s announcement comes just a day before the Bank of England is expected to make its latest interest rate decision, as inflation has also been rising in the UK. The Bank of England is widely anticipated to keep its benchmark rate at 4.75%.
Monica George Michail, an associate economist at the National Institute of Economic and Social Research, noted that the UK is facing higher wage growth and price increases for services compared to the US. Additionally, government policies, including increases to the minimum wage, are expected to put further pressure on inflation. She stated that the Bank of England is taking a cautious approach, but also warned that inflation risks exist in the US, especially with President Trump’s tariff plans.
John Ryding, chief economist at Brean Capital, remarked that the Bank of England, unlike the Fed, does not need to consider unemployment in its mandate, and is thus more directly responding to the current situation. He described the Bank of England as being more prudent than the Federal Reserve in its approach.
