Federal Reserve lowers primary interest rate, anticipates improved economy next year

The Federal Reserve has lowered its key interest rate by 0.25 percentage points to 3.6%, marking its third consecutive reduction. This decision highlights the Fed’s cautious stance in the face of ongoing inflation and a softening labor market. Chair Jerome Powell indicated that further rate cuts may be paused as the Fed takes a wait-and-see approach guided by incoming economic data, with projections suggesting just one additional cut by 2026. The decision showcased notable divisions within the Fed’s committee, with three members dissenting, the highest number in six years.

The Fed’s hesitation stems from conflicting economic indicators: inflation remains stubbornly high, with prices up 25% since the pandemic, while the labor market shows signs of weakness, including decelerating job growth and an increasing unemployment rate. Powell noted concerns that the job market could be weaker than official reports suggest, although consumer spending and investments in AI appear robust.

In response to the rate cut, President Trump criticized the decision as inadequate and hinted at appointing a new Fed chair, possibly signaling steeper cuts ahead. Powell aims to ensure inflation remains controlled and the labor market stays healthy. The Fed plans to reassess monetary policy in late January, once more economic data is available.

Additionally, the stock market reacted positively to the rate cut, reflected by the performance of the S&P 500. The SPDR S&P 500 ETF Trust (SPY) is currently priced at 687.57 USD, having experienced a slight ce of 4.54 USD (0.01%) from the previous close, with intraday movements between 681.36 USD and 688.9 USD.