For the second time in a row, the Federal Reserve (Fed) of the United States of America (USA) cut interest rates by 25 basis points, moving the federal rate to the range between 3.75% and 4%, a level where it has not been since December 2022.
It was a cut expected by the market and the vote confirmed the almost “simple” reduction, with ten votes in favor and only two against, among the board of governors.
They voted against Stephen Miran, the name proposed by Donald Trump for the board in September. The economist considered, for the second consecutive meeting, that the 25 basis point cut was insufficient and wanted a 50 point reduction. The other “denial” came from Jeffrey Schmid, who preferred not to change interest rates at this time.
“Available indicators suggest that economic activity has been expanding at a moderate pace. Job creation slowed this year and the unemployment rate increased slightly, but remained low until August; the most recent indicators are consistent with these developments”, says the Fed, in a statement. “Inflation has increased since the beginning of the year and remains somewhat high.”
The relationship between the central bank and the White House has been controversial, with Donald Trump pushing for further interest rate cuts in order to reduce financing costs and support economic growth. However, Chairman Jerome Powell has been cautious in his approach because he says the tariffs will promote a rise in inflation.
At the moment, annual inflation is at 3%, above the central bank’s target of 2%. Energy costs and factors linked to the trade war have been preventing the price index from falling to the desired level. Lately, several officials have been talking about a deterioration in the job market.
In addition to interest, the central bank also announced that it will put an end to reducing the pace of asset purchases, known as the “quantitative easing“, from December 1st. The process has been underway since 2022 and has made it possible to reduce its balance sheet by 2 billion dollars in Treasury bonds.
Monetary policy decisions are made by the seven members of the Federal Reserve System’s board of governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis.
The three largest US indices (S&P 500, Nasdaq and Dow Jones) opened the day on a high, but began to trade lower after the decision.
Markets have reduced their bets on a new cut in December, which remains high. Before, the forecast was 90% and now it is 76%.
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