For the third time in a row, the US Federal Reserve lowered interest rates by a quarter-point on Wednesday. Despite worries about possible deflation and the possible effects of recent policy changes, this decision was made.
The Fed has reduced the reverse repo rate to 4.25% and the federal funds target rate range to 4.25 to 4.50%.
The US central bank acknowledged that inflation levels are still somewhat high but said recent economic data suggest sustained expansion. According to the report, the risks of reaching its inflation and employment targets are "roughly in balance".
Expectations for further rate cuts have been dampened by a small increase in US inflation in recent months. The Fed had previously predicted four quarter-point rate decreases in 2025, but now only sees two. They have also increased their forecast for inflation to 2.5% from 2.1% for the upcoming year.
Because of the recent increase in inflation, analysts had already predicted that rate cuts would go more slowly, requiring higher interest rates for a longer duration. In order to meet its inflation targets, the Fed has stated that they will closely monitor incoming data and modify their monetary policy stance as necessary.
In line with their September forecast, the Fed has already decreased rates by a full percentage point this year with the most recent cut. By the end of 2025, the key lending rates are expected to be between 3.75% and 4%, according to current predictions.
The Fed's most recent rate decision will be the last policy action before Republican Donald Trump replaces Democratic President Joe Biden. Trump has outlined some more aggressive economic measures, including as raising tariffs.
In an effort to promote demand in the economy and strengthen the labour market, the Fed recently started lowering interest rates after making significant headway in combating inflation through rate hikes over the previous two years.
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