Impact of the Fed’s rate cut – London Business News | Londonlovesbusiness.com

The Federal Reserve of the United States (Fed) has taken a new step to adjust its monetary policy: it reduced its interest rate by 25 basis points, bringing it to 4.75%.

This move follows a previous cut of 50 basis points in September of this year, 2024. With this second adjustment, the Fed aims to provide more flexible monetary conditions in a context of moderately high inflation.

The measure is intended to encourage investment and consumption, attempting to balance price stability and economic growth.

Inflation in September stood at 2.7%, which, although high, is not far from the Fed’s projected target of 2.6%.

This level of inflation, though under control, has led to adjustments in interest rates, as higher inflation levels can erode consumers’ purchasing power and reduce economic growth.

The Fed considers that slightly above-target inflation is not an immediate cause for alarm but does require constant monitoring to prevent an escalation that could complicate price control.

The market anticipates that the Fed may implement two additional rate cuts in the first half of 2025, bringing rates between 3.75% and 4%. These future cuts reflect expectations that the U.S. economy may require continued monetary stimulus to face a potential economic slowdown. These expectations have also contributed to more excellent stability in financial markets, as investors see these cuts as an opportunity for growth.

Meanwhile, the election of Donald Trump as president-elect of the United States has sparked new speculations regarding the country’s economic policy. The incoming administration has indicated it may implement expansive fiscal policies, which could increase inflation and financial uncertainty. This would place the Fed in a challenging position, as it would have to choose between prioritizing inflation control or maintaining its low-rate policy to support growth.

Regarding medium-term impact, the combination of expansive fiscal policies and moderate monetary policy could create tensions. While the Fed seeks to normalize the economic situation, the fiscal stimulus proposed by the Trump administration could increase demand and, consequently, inflation levels. This would lead to a slower, more cautious monetary policy adjustment, complicating the economic stabilization.

In conclusion, the recent rate cut by the Fed and the expectation of future adjustments reflect the institution’s efforts to manage economic growth and control inflation. However, Donald Trump’s election introduces an additional variable into the equation, as his expansive fiscal policies could drive prices higher and add uncertainty to the economic environment. The interaction between these policies and the Fed’s strategy will be crucial in the coming years, as the challenge will be maintaining a balance between economic stimulus and price stability.