Fed cuts rates by quarter point but offers no guidance for the future

The US Federal Reserve cut its benchmark interest rate by a quarter-point on Thursday amid uncertainty about the outlook for the world’s largest economy following Donald Trump’s decisive victory in the US presidential election.
The unanimous decision lowered the target range to 4.5-4.75 per cent and marked a downshift in the pace from September’s half-point cut, which rate-setters made to stave off weakness in the US jobs market.
Earlier in the day, the Bank of England cut UK interest rates, also by a quarter point, to 4.75 per cent after inflation fell to a three-year low in September, but signalled that a further move is unlikely before early 2025.
In a statement on Thursday, the Federal Open Market Committee said that the US economy was expanding at a “solid pace” even as labour market conditions had “generally eased” compared with earlier in the year.
It continued to characterise inflation as “somewhat elevated”, affirming that the risks to achieving both low, stable inflation and a healthy jobs market were “roughly in balance”.
While the US central bank is an independent institution, the president-elect lambasted rate-setters for not cutting borrowing costs swiftly enough during his first term. Mr Trump will have the opportunity to nominate a new chair once Jay Powell’s term ends in May 2026, with only one other seat on the seven-seat board of governors coming up between now and the end of his second term.
The Fed opted against providing specific guidance about what will happen to rates next – saying it will act on the data.
In the UK, the Monetary Policy Committee’s eight-to-one decision to cut the base rate by 0.25 percentage points was in line with the expectations of economists polled by Reuters.
The BoE kept rates on hold at its previous meeting in September, following a reduction in August.
“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” said Andrew Bailey, the BoE governor, on Thursday. “But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here,” he added.
Inflation hit 1.7 per cent in September, the first time it has dipped below the bank’s 2 per cent target since 2021, but the bank expects it to increase in coming quarters. Partly as a result of the budget, the BoE considers that inflation will now take longer than previously expected to return to target, reaching 2.2 per cent in two years’ time before falling to 1.8 per cent by the end of the following year. – Copyright The Financial Times Limited 2024