US markets slide as Fed slows rate cuts, inflation concerns persist
US stock markets took a sharp hit after the Federal Reserve implemented its third consecutive interest rate cut but signalled a slower pace of reductions in the coming year.
As widely anticipated, the central bank lowered its key lending rate to a target range of 4.25% to 4.5%. This marks a full percentage point decrease since September when the Fed began cutting rates to stabilize prices and mitigate economic risks.
Federal Reserve Chairman Jerome Powell tempered market optimism during a press conference, indicating a cautious approach moving forward. “We are entering a new phase of this process. From this point forward, it’s appropriate to move cautiously and look for progress on inflation,” Powell said.
The remarks sent US stocks tumbling. The Dow Jones Industrial Average dropped 2.58%, logging its 10th consecutive daily loss—a streak not seen since 1974. The S&P 500 fell nearly 3%, and the tech-heavy Nasdaq Composite declined by 3.6%.
Asian markets reflected the ripple effect, with Japan’s Nikkei 225 down 1.2% and Hong Kong’s Hang Seng dropping 1.1% in early Thursday trading.
Recent reports show inflation ticked up to 2.7% in November, highlighting persistent pricing pressures. Despite signs of resilience in job creation, analysts caution that Federal Reserve policies could complicate efforts to curb inflation.
Policies proposed by President-elect Donald Trump, including tax cuts and increased tariffs, are expected to further strain inflation control efforts. “Growth remains strong, and the labour market is healthy, but inflationary storms are gathering,” said Olu Sonola, head of US economic research at Fitch Ratings.
Lowering borrowing costs might stimulate demand by encouraging businesses and households to borrow and spend, which could push prices even higher.
Chairman Powell defended the rate cuts, pointing to a cooling labour market over the past two years. However, he acknowledged uncertainty as the White House transitions to a new administration.
Wednesday’s rate cut was not unanimously agreed upon, with one Federal Reserve policymaker formally opposing it. Forecasts now show the Fed’s key lending rate is expected to fall to 3.9% by the end of 2025, slightly above the 3.4% projection made three months earlier. Inflation is also expected to stay elevated, with a forecast of 2.5% in 2025, surpassing the Fed’s 2% target.
Some experts, including John Ryding, chief economic advisor at Brean Capital, criticized the Fed’s move. “The economy looks strong, and inflation has eased significantly. What’s the rush to cut rates?” he asked.
The Federal Reserve’s announcement comes ahead of the Bank of England’s decision on interest rates. The UK central bank is expected to maintain its benchmark rate at 4.75%, even as it faces its own inflationary pressures from higher wages and service costs.
Monica George Michail, associate economist at the National Institute of Economic and Social Research, noted that wage growth and service price increases in the UK are surpassing those in the US. “The Bank of England is trying to remain cautious, but inflation risks are still present in both economies,” she said, citing Trump’s tariff plans as a lingering threat.
Ryding added, “The Bank of England seems more prudent compared to the Fed, responding to inflation realities without overreaching.” As global economic uncertainties persist, central banks continue to navigate the fine line between fostering growth and curbing inflation.
