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The US Federal Reserve has voted to cut interest rates by 25 basis points as investors assess the likely inflationary impact of a second Trump presidency.
The decision, the second in the cutting cycle, was widely anticipated by markets and means the federal funds rate stands in a range of 4.50-4.75 per cent.
The size of the cut suggests the Fed will take a cautious approach to lowering borrowing costs over the coming months, having kicked off the cutting cycle with a hefty 50 basis point cut in September.
Since that decision, incoming data has painted a positive picture of the world’s largest economy, rather than pointing to the rapid deterioration that some feared a few months ago.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Fed said in a statement accompanying the decision.
The US economy expanded 2.8 per cent on an annualised basis in the third quarter, a slight slowdown on the previous quarter but still growing at a healthy pace.
Inflation has also continued to ease, with the latest figures putting the headline rate at 2.4 per cent, its lowest level since February 2021. Unemployment remains low at 4.1 per cent.
And while October’s payroll figures were the weakest during Joe Biden’s presidency, showing that just 12,000 jobs were created in the month, most economists put this down to extraneous factors.
The Fed said that the risks to acheiving its employment and inflation goals are “roughly in balance”.
“The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate,” it said.
The Fed’s rate decision comes just a few days after it was confirmed that Donald Trump would return as US President.
Trump has pledged to cut taxes for businesses and impose tariffs on foreign imports, which could spark a resurgence in inflationary pressures.
Economists think that Trump’s re-election will mean that the Fed is unable to cut interest rates aggressively in 2025.
“Trump’s win slams the door on rapid Fed normalisation next year,” Oliver Allen, a senior US economist at Pantheon Macroeconomics, said.
Allen said Trump’s tariffs “threaten to snatch defeat from the jaws of victory” in the fight against inflation.
Markets will be paying close attention to any comments that Fed Chair Jerome Powell makes regarding Trump’s return as President.
The Bank of England also cut interest rates by 25 basis points earlier today, the second rate reduction in its loosening cycle.
