Fed Reduces Interest Rates: The US Central Bank Federal Reserve has cut interest rates by 25 basis points (0.25%). Now interest rates will be between 4.25% to 4.50%. This is the third time this year that the Fed has cut interest rates. Earlier, on September 18 and 8, the Fed had cut interest rates by 25 (0.25%) and 50 basis points (0.50%).
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Fed Reduces Interest Rates
The September cut was made after about 4 years. The Fed Reduces Interest Rates in September 2024 after March 2020. To control inflation, the Central Bank of America had increased interest rates 11 times between March 2022 and July 2023.
Fed Reduces Interest Rates Kept Unchanged for Three Consecutive Times in 2023
Last year, the Federal Reserve had kept interest rates unchanged for the third consecutive time in its policy decision. On July 26, 2023, the Fed kept the policy rate unchanged in the range of 5.25%-5.5% as per market expectations.
However, the Fed had also indicated that rate cuts will be seen in 2024 and it may come down to 4.6%. The Fed started raising rates in March 2022 to tackle inflation. By July last year, these rates had increased to the highest level in 23 years.
The Fed Rate Decides How Much Interest Banks Will Charge Each Other
Federal rates decide how much interest banks will charge on loans given to each other overnight. But it often also affects consumer debt, mortgages, credit cards, and auto loans.
What Could be the Impact of the Fed Reduces Interest Rates?
- Too many cuts could spoil America’s economic health. Investors’ enthusiasm may be dampened.
- Fewer cuts cause disappointment in the market because the market is expecting more cuts in interest rates.
- A delay in cutting interest rates may slow down the pace of the job market.
Any central bank has a powerful tool to fight inflation in the form of the policy rate. When inflation is very high, the Central Bank tries to reduce money flow in the economy by increasing the policy rate.
If the policy rate is high then the loan that banks get from the Central Bank will be expensive. In return, banks make loans costlier for their customers. This reduces money flow in the economy. If money flow decreases, demand decreases and inflation decreases.
Similarly, when the economy goes through a bad phase, there is a need to increase money flow for recovery. In such a situation, the Central Bank reduces the policy rate. Due to this, the loan received by the banks from the Central Bank becomes cheaper and the customers also get the loan at a cheaper rate.
American Economy is Growing at a Solid Pace
The Federal Reserve said that recent data shows that the US economy is growing at a solid pace, although inflation remains somewhat high. The Fed also believes that the labor market has improved and the unemployment rate remains low, but inflation is approaching its target of 2%.
The US Federal Reserve cut interest rates and signaled it will slow the pace at which borrowing costs fall any further, given a relatively stable unemployment rate and little recent improvement in inflation https://t.co/cAEwm2tCDR pic.twitter.com/yXFNYa2CsZ
— Reuters (@Reuters) December 18, 2024
Inflation and Rates Forecast for 2025
US inflation has accelerated in recent months, raising expectations that the pace of rate cuts will slow down next year. The Fed forecasts only two quarter-point rate cuts by 2025, down from four quarter-points previously. Along with this, it has increased its inflation target from 2.1% to 2.5%.
Jay Chavda He is the Founder and Writer of businesspulsecare.com. He is an I.T Engineer, Freelancer, Businessman. He posts Business, Stock/Share Market, Finance Related News and updates on the website. 🔗