The Federal Reserve has announced a quarter-point reduction in its key interest rate, following signs of cooling inflation and the re-election of Donald Trump. The rate cut, the second in recent months, brings the Fed’s benchmark rate to approximately 4.6%, down from a high of 5.3% in September, as the central bank seeks to support the job market alongside stabilizing inflation.
Thursday’s rate cut follows a half-point reduction in September and reflects the Fed’s continued focus on economic growth as inflation dips closer to its 2% target. Inflation, which peaked at 9.1% in mid-2022, now stands at 2.4%, the lowest in 3.5 years. Despite the Fed’s actions, consumer spending remains high, and unemployment, though slightly higher, remains relatively low.
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As Trump prepares to take office again, financial markets are responding with rising Treasury yields and expectations of higher inflation due to Trump’s proposed economic policies, which include tariffs on imports and increased spending. These shifts may complicate the Fed’s path forward, as the higher borrowing costs driven by market yields could counteract the effects of the Fed’s recent cuts.
Fed Chair Jerome Powell indicated that the central bank remains committed to carefully balancing growth and inflation control. However, Trump’s vocal criticism of the Fed and his intent to influence interest rate decisions have raised concerns over potential political interference. During his previous term, Trump criticized Powell for raising rates, and similar pressure may surface as Trump begins his new term.
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Economists have warned that Trump’s planned tariffs could push inflation to between 2.75% and 3% by mid-2026. Although the Fed aims to ease borrowing costs, the rise in broader interest rates is already impacting mortgages, auto loans, and other consumer credit, creating a unique challenge for the central bank.
With economic growth approaching a steady 3% annual rate and consumer spending remaining robust, the Fed may face increased pressure to reassess further rate cuts if inflation begins to climb again.
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