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The US Federal Reserve (Fed) cut interest rates for the third consecutive time this year, by 25 basis points (0.25%). After the Fed's adjustment, the US stock market immediately turned around and fell sharply.
On December 18, the Fed decided to continue easing monetary policy. Accordingly, the US reference interest rate was 4.25-4.5%, a decrease of 25 basis points (0.25%). This is the third consecutive time that this agency has reduced interest rates. The previous two times, the reductions were 0.5% and 0.25%, respectively.
"Economic activity continues to expand at a solid pace. Unemployment remains low and inflation is rising moderately," the Fed's Federal Open Market Committee (FOMC) said in a statement. They said they would carefully consider upcoming data, both the outlook and risks, in making their interest rate decision.
This has raised doubts that the Fed will stop cutting interest rates at its meeting in late January 2025. Next year, Fed officials expect to cut interest rates only twice, each time by 25 basis points. They also raised their inflation forecast for Donald Trump's first year in office from 2.1% to 2.5%. This rate is higher than the Fed's target of 2%.
Slowing inflation is prompting the Fed to slow its monetary easing, with interest rates likely to fall to 3.1% in 2027, down from the 2.9% forecast in September.
After the Fed's adjustment, the US stock market immediately turned around and fell sharply. The S&P 500 index is currently down 0.6%, the DJIA is down 0.54% and the Nasdaq Composite is down 0.68%.
The world gold price also plummeted. Each ounce lost 20 USD in just 10 minutes, to 2,617 USD.
The Fed's benchmark rate applies to overnight interbank loans. It is not what consumers and businesses pay, but the Fed's moves affect lending and savings rates.
When interest rates are low, borrowing costs are cheaper, allowing businesses to invest in new projects or hire more employees. Similarly, consumers spend more because savings are less attractive.
However, economists say it will take at least a year for the impact of this adjustment to be felt in the economy. This explains why interest rates in the US increased in early 2022, but inflation only started to cool down a year later.
Over the past year and a half, the Fed has raised interest rates 11 times to curb inflation.
VN (synthesis)