Economy

Federal Reserve Cuts Interest Rates Amid Steady Decline in Inflation Following Trump Victory

The Federal Reserve has reduced its key interest rate by a quarter-point, bringing it to approximately 4.6%, down from 5.3%. This decision follows a larger half-point cut in September and reflects the Fed’s attempt to balance economic growth and inflation control.

The latest rate cut aims to support the labor market and address inflation, which now sits just above the Fed’s 2% target. Inflation has decreased significantly from its peak of 9.1% in mid-2022 to 2.4% in September, marking a three-and-a-half-year low.

The recent cut was implemented following Donald Trump’s victory in the presidential election, which raised expectations of faster economic growth, larger federal budget deficits, and potential inflation. Trump’s proposed policies, including a 10% tariff on imports, increased taxes on Chinese goods, and possible mass deportations, are projected to drive up inflation. Economists from Goldman Sachs predict these measures could push inflation to 2.75%-3% by mid-2026.

Despite the recent rate reductions, investors have raised Treasury yields since September, which has resulted in higher borrowing costs across the economy. This counteracts some of the benefits consumers might expect from the Fed’s rate cuts, as mortgage and car loan rates have risen, even as the Fed lowers its benchmark rate. The Fed’s decision has also sparked debate on its future moves, given the conflicting signals from the economy.

Consumer spending remains strong, boosted by higher-income shoppers, contributing to healthy economic growth at an annual rate near 3%. However, hiring has slowed, and job market weakness has been a concern for the Fed, with Chair Jerome Powell suggesting that the recent rate cut aims, in part, to support employment.

As Trump prepares to assume office, his stance on Fed independence has raised concerns about potential political interference in the Fed’s policies. Trump previously criticized Powell for rate hikes and has suggested the president should have a say in Fed decisions, which challenges the institution’s long-standing independence.

The Fed’s policymakers had originally projected further cuts through November, December, and into the next year. However, the strong economy and Trump’s anticipated policy changes may reduce the likelihood of continued rate cuts, especially if inflation rises. The Fed now faces the task of balancing growth and inflation, with Powell emphasizing that the Fed’s policy remains independent of political influence in the near term.

ALSO READ: 2024 US Elections Result: How Did Trump’s Victory Boost the Wealth of the Top 10 Richest by $64B?

Vanshika Tyagi

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