US stock markets took a sharp hit after the Federal Reserve announced its third consecutive interest rate cut, accompanied by projections that hinted at a slower pace of cuts in the coming year. While the Fed lowered its key lending rate to a target range of 4.25% to 4.5%, its cautious outlook has left markets uncertain about the future of economic growth and inflation control.
In a widely anticipated move, the Federal Reserve reduced interest rates by one percentage point since September, citing progress in stabilizing inflation and concerns about potential economic weakening.
Fed Chairman Jerome Powell emphasized the need for a cautious approach moving forward. “We are in a new phase of the process. From this point forward, it’s appropriate to move cautiously and look for progress on inflation,” Powell said during a press conference.
Despite the rate cuts, inflation remains stubborn, ticking up to 2.7% in November, while job creation has been more resilient than expected. Powell acknowledged that the decision to cut rates this time was a “closer call” due to ongoing uncertainties, including the policy direction of incoming president-elect Donald Trump.
US stocks reacted negatively to the Fed’s announcement. The Dow Jones Industrial Average fell by 2.58%, marking its 10th consecutive session of losses—its longest streak since 1974. The S&P 500 dropped by nearly 3%, and the Nasdaq Composite saw a 3.6% decline.
The impact extended to global markets, with Japan’s Nikkei 225 falling 1.2% and Hong Kong’s Hang Seng Index dropping by 1.1% during Thursday’s trading.
The Fed’s decision to lower borrowing costs has sparked concerns among analysts about potential inflationary pressures. Lower rates make borrowing cheaper, encouraging businesses and households to take on more credit, which can drive up demand and lead to higher prices.
While Powell defended the cut, pointing to cooling trends in the job market over the last two years, he warned that inflation risks remain elevated, particularly with the incoming administration’s plans for tax cuts and widespread import tariffs.
According to Olu Sonola, head of US economic research at Fitch Ratings, the Fed’s move signals a likely pause in rate cuts as uncertainty looms. “Growth is still good, the labor market is still healthy, but inflationary storms are gathering,” Sonola said.
The Fed’s latest forecasts show that the central bank expects its key lending rate to fall to 3.9% by the end of 2025, slightly higher than the 3.4% projected just three months ago. Policymakers also anticipate inflation remaining above their 2% target, hovering around 2.5% next year.
Some experts, like John Ryding, chief economic advisor at Brean Capital, questioned the timing of the cut. “There has been enormous progress from the peak in inflation to where the US is now, and it risks giving up on that progress. The economy looks strong—what’s the rush?” Ryding said.
The Fed’s cautious stance comes as the Bank of England prepares to make its own interest rate decision. The UK central bank is widely expected to hold its benchmark rate steady at 4.75%, even as inflation pressures mount.
Monica George Michail, an economist at the National Institute of Economic and Social Research (NIESR), noted that the UK is grappling with rising wage growth and higher service costs, which are driving inflation faster than in the US. Government policies, including minimum wage hikes, are also expected to add to the pressure.
Michail praised the Bank of England’s cautious approach, suggesting it was responding more prudently to the economic challenges compared to the Fed. “The Bank of England is trying to remain cautious,” she said, adding that inflation risks persist in both the UK and the US.
The Federal Reserve’s latest rate cut has left investors uncertain about the economic outlook, with inflation risks still looming. While the move aims to stabilize growth, it underscores the fine balance central banks must strike between controlling inflation and supporting economic activity. As markets react to these developments, global attention will also turn to the Bank of England for further signals on how major economies plan to navigate their inflation challenges.
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