Having previously implemented cuts in September and November, the Federal Reserve (Fed) cut US interest rates at its December meeting. The 25-basis-point cut reduced the key federal funds rate to a range of 4.25% to 4.5%.
- The UK base rate remained at 4.75%
- US rates are set to fall more slowly than previously forecast
- UK CPI inflation reached its highest level since March
Having previously implemented cuts in September and November, the Federal Reserve (Fed) cut US interest rates at its December meeting. The 25-basis-point cut reduced the key federal funds rate to a range of 4.25% to 4.5%. Federal Open Market Committee (FOMC) members voted by 11 to one in favour of the cut, despite some concerns that President-elect Donald Trump’s planned policies could stoke inflationary pressures. The annualised rate of inflation in the US rose from 2.6% to 2.7% in November. Fed Chair Jerome Powell warned: “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.” He also acknowledged that Fed officials faced some policy-related uncertainty ahead of the forthcoming change at the White House.
“Rate reductions in the US during 2025 are set to be somewhat slower than previously expected&rdquo
Updated projections from the Fed suggest that rate reductions in the US during 2025 are set to be somewhat slower than previously expected. The federal funds rate is forecast to decline to 3.9% by the end of next year, compared with an earlier projection of 3.4%, while inflation is predicted to remain above the Fed’s 2% target over 2025. Nevertheless Chair Powell struck a cautiously upbeat tone, saying: “The US economy is just performing very, very well. Substantially better than our global peer group.”
In the UK, the Bank of England (BoE) maintained its key interest rate at 4.75% in December. The decision was not unexpected following disappointing news on inflation: the rate of consumer price inflation rose for a second straight month in November, climbing from 2.3% year on year in October to 2.6%, and reaching its highest rate since March – well above the BoE’s 2% target. Inflation in the services sector remained stubbornly high at 5%, while core inflation – which strips out energy and food – increased from 3.3% to 3.5%.
The decision to hold rates steady was not unanimous: six members of the nine-strong Monetary Policy Committee (MPC) voted for no change, while three voted in favour of a 25-basis-point cut, citing “sluggish demand and a weakening labour market”. Policymakers highlighted “significant uncertainty” about how the UK economy will react to the combined impact of measures in the Budget, including the increase in employers’ National Insurance contributions. Looking ahead, the MPC appears likely to pursue a “gradual approach” to monetary loosening.
