The Fed cuts interest rates by 0.25 percentage points

The Fed cut interest rates for the second consecutive time in light of declining inflation. The Federal Reserve announced Thursday night that it would cut its key interest rate by 0.25 percentage points to a range of 4.5% to 4.75%.

Commercial banks can borrow central bank funds at this rate. In September, the central bank of the world's largest economy cut its key interest rate for the first time since the outbreak of the coronavirus pandemic. It's unclear what impact the return of Republican Donald Trump will have on the Fed's interest rate policy.

Inflation in the U.S. is falling

The Fed's classic job is to control inflation. Inflation fell further in September, but was less than expected. Consumer prices increased by 2.4% compared with the same month last year. Inflation is the lowest since February 2021. It was 2.5% in August. The monetary authority said inflation was moving towards its long-term target of 2%.

Furthermore, the latest indicators show that the economy continues to grow at a solid pace. The labor market cooled slightly. The report said the unemployment rate increased slightly but remained at a low level. Interest rate decisions are made unanimously.

The Fed signaled in September that it would cut interest rates further this year. The Fed expects its key interest rate to average 3.4% in the coming year. The central bank will only release new forecasts in December, which will also take into account Trump's new presidency.

Trump wants low interest rates

The Federal Reserve operates independently of the U.S. government. During his tenure in the White House, Trump, a Republican, clashed with the Fed many times, suggesting interest rate cuts and harshly criticizing Fed Chairman Jerome Powell. There are fears he will try to interfere in monetary policy decisions again when he returns to the White House in January.

In addition, Trump also plans to implement high tariffs and tax cuts. This policy is expected to cause inflation to rise again. Given these prospects, it is unclear whether the Fed will continue to lower interest rates significantly or whether it will continue to pursue a policy of high interest rates for an extended period of time.

High interest rates slow demand. Private individuals and businesses spend more on loans – or they borrow less. Economic growth is slowing and businesses cannot pass on higher prices indefinitely – ideally, inflation is falling.

Powell will stay in office until 2026

In a second term, Trump is likely to at least try to pressure the Fed to cut interest rates. Over the longer term, central bank personnel are also likely to change. As president, Trump nominated Powell for his first term as Fed chairman but later criticized him for raising interest rates.

He recently said he would not fire Powell. But Powell's term ends in 2026, when Trump can nominate a new Fed chairman. He has said he will not renominate Powell. (Sudan Development Authority/Africa Working Group/Department of Political Affairs)

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