US monetary policy
The Federal Reserve lowers the key interest rate again
The US Federal Reserve made its interest rate decision under difficult conditions: the key interest rate was reduced for the third time in a row. Central Bank Chairman Powell continues to be under massive pressure.
The US Federal Reserve (Fed) has cut its key interest rate for the third time in a row. It was again reduced by a quarter point to the new range of 3.50 to 3.75 percent.
The Fed reduced the key monetary policy rate in September for the first time this year and increased it in October. This was justified by signals of weakness from the labor market.
Difficult external conditions
The monetary authorities had to make their decision under difficult conditions. Due to the government’s 43-day budget shutdown in October and November, important official data on the labor market and inflation are missing. The central bankers therefore had to rely more than usual on estimates from private institutes and their own surveys.
In September, consumer prices had risen to 3.0 percent compared to the previous year, well above the Fed’s medium-term inflation target of 2.0 percent. That would speak against a reduction in interest rates. However, experts had feared an even stronger increase, meaning that concerns about the US labor market outweigh the inflation problem.
With its interest rate decisions, the US Federal Reserve is trying to find a compromise between stable prices and as many full-time employees as possible. If the key interest rate is too high, it slows down the economy because borrowing costs are too high. Although a lower interest rate stimulates growth and the labor market, it can increase inflation.
Powell has been under pressure for a long time
There are also statements from US President Donald Trump. In recent months, Fed Chairman Jerome Powell has repeatedly put pressure on him with calls for significant interest rate cuts – also in order to stimulate the housing market. The Republican wants to address concerns about the general affordability of housing before the important midterm elections next year.
Outgoing Fed Chairman Powell’s term ends in May. Trump has announced that he will nominate a successor in early 2026. Trump advisor Kevin Hassett is considered a promising candidate.
Experts warn against excessively loose interest rate policy
Experts warn that raising interest rates too quickly could backfire. If the Fed loosens more aggressively than markets think is warranted, investors could view it as inflationary, said Citigroup chief economist Nathan Sheets. This would drive up long-term interest rates, including mortgage rates. This would throttle the very sector that Trump actually wants to strengthen. “That would stifle the real estate market,” Sheets said.
Elmar Völker, economist at LBBW, therefore expects a break in interest rates at the beginning of next year. “We do not expect another interest rate adjustment before early summer 2026, when the Fed chairmanship changes. Overall, in line with the current Fed consensus, we only expect an interest rate cut of 25 basis points for 2026.”
Fed issues new forecasts
The Fed now expects more growth next year than before. The central bank now expects a median increase of 2.3 percent for 2026 – in September the experts had predicted 1.8 percent for the new year. Economic expectations for the coming year rose slightly to 1.7 percent (previously 1.6 percent).
Meanwhile, inflation is likely to ease in 2026: Despite Trump’s aggressive tariff policy, the central bank now expects a figure of 2.4 percent instead of the previous 2.6 percent. The experts had predicted an inflation rate of 3.0 percent for 2025 – now they expect 2.9 percent.
