Inflation in the United States has increased to 2.7% in November, causing ripples across financial markets and prompting a cautious stance from central banks on both sides of the Atlantic. The Federal Reserve, under Chairman Jerome Powell, has set its key lending rate within a target range of 4.25% to 4.5%, while signaling a likely pause in further rate cuts in the coming year. Concurrently, the Bank of England faces similar challenges as it prepares to make its latest decision on interest rates amidst rising inflation in the UK.
US share prices tumbled following the Federal Reserve's recent interest rate cut, the third consecutive reduction aimed at stabilizing prices and preventing economic slowdown. The Dow Jones Industrial Average closed 2.58% lower, marking its tenth consecutive session of declines. Meanwhile, the S&P 500 and Nasdaq Composite experienced significant losses, dropping almost 3% and 3.6%, respectively.
Jerome Powell, reflecting on the economic landscape, stated,
"We are in a new phase of the process." – Jerome Powell
This underscores the Fed's cautious approach in addressing inflationary pressures without compromising economic stability. Powell further emphasized,
"From this point forward, it's appropriate to move cautiously and look for progress on inflation." – Jerome Powell
The Fed's decision to cut interest rates, despite progress in price stabilization, highlights concerns over potential economic weakening. However, analysts like Olu Sonola from Fitch Ratings perceive this as a signal of a pause in rate cuts, suggesting a strategic shift in monetary policy.
"Growth is still good, the labour market is still healthy, but inflationary storms are gathering." – Olu Sonola
President-elect Donald Trump's proposed policies, including tax cuts and import tariffs, have been flagged by analysts as factors that could exacerbate inflationary pressures. The Federal Reserve's current outlook anticipates a modest reduction in its key lending rate to 3.9% by the end of 2025, suggesting a gradual approach towards monetary easing.
The decision to continue with rate cuts faced criticism from some quarters. John Ryding, chief economic advisor at Brean Capital, argued that it might have been prudent for the Fed to refrain from cutting rates at this meeting. He pointed out that the Bank of England is exhibiting more caution compared to the Fed in its monetary policy decisions.
In the UK, the Bank of England is poised to announce its latest interest rate decision as it navigates rising inflationary trends similar to those in the US. The central bank's cautious stance underscores the global nature of economic uncertainties currently facing policymakers.
Mortgage rates have paradoxically risen since September, reflecting market expectations that borrowing costs will remain elevated. This trend further complicates the economic landscape for both consumers and businesses navigating the financial environment.