Background and Justification
The decision of the US Federal Reserve (Fed) to keep the key interest rate unchanged in the range of 4.25 to 4.50 percent has significant implications for financial markets and investors. This decision was made despite intense calls for a rate cut, particularly from President Donald Trump. Trump had demanded a reduction of the key interest rate by 2 percentage points, which, however, was not considered by the Fed.
Economic Conditions
The Fed justifies its decision with solid economic activity and a low unemployment rate. Current indicators suggest that the economy continues to grow steadily, although fluctuations in net exports have influenced the data.
Inflation and Real Interest Rate
Inflation is slightly elevated but is close to the Fed’s target of 2 percent. The real interest rate, which represents the difference between the key interest rate and inflation rate, is just under 2 percent. This could be an argument for a rate cut, but the Fed did not consider it sufficient.
Political Pressure
President Trump has put pressure on Fed Chairman Jerome Powell and repeatedly called for a reduction in the key interest rate. Furthermore, Trump has vaguely threatened coercive measures and announced that he would soon appoint Powell’s successor.
Impacts on Financial Markets and Investors
The Fed’s decision to keep the key interest rate unchanged signals stability and confidence in economic policy. This can lead to a stabilization of financial markets, as investors respond to a clear monetary policy direction.
Future Interest Rate Developments
The so-called Dot Plot of the Fed indicates that there could be two rate cuts in 2025. This would lower the key interest rate at the end of the year to a range of 3.75 to 4 percent.
Inflation Expectations and Economic Growth
The Fed expects higher inflation and lower GDP growth for the year 2025. These forecasts could influence monetary policy decisions in the coming months.
Overall, the Fed’s decision to keep the key interest rate steady shows that the central bank pursues its monetary policy strategy independently of political pressure and focuses on economic indicators. This stability can have both positive and negative effects on various market segments, depending on the expectations and strategies of investors.