Background and Rationale
The decision of the US Federal Reserve (Fed) to maintain the key interest rate unchanged in the range of 4.25 to 4.50 percent has significant impacts on financial markets and investors. This decision was made despite intense demands for a rate cut, particularly from President Donald Trump. Trump had called for a reduction of the key interest rate by 2 percentage points, which, however, was not taken into account 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 remains close to the Fed’s target of 2 percent. The real interest rate, reflecting the difference between the key interest rate and inflation rate, is just under 2 percent. This could be an argument for a rate cut, yet the Fed did not deem it sufficient.
Political Pressure
President Trump has pressured Fed Chair Jerome Powell and repeatedly called for a reduction of the key interest rate. Moreover, Trump has vaguely threatened coercive measures and announced that he would soon appoint Powell’s successor.
Impact 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 stabilization in financial markets, as investors respond positively to a clear monetary policy direction.
Future Interest Rate Developments
The so-called Dot Plot of the Fed indicates that there could be two interest rate cuts in 2025. This would lower the key interest rate to a range of 3.75 to 4 percent by the end of the year.
Inflation Expectations and Economic Growth
The Fed expects higher inflation and lower GDP growth for the year 2025. These forecasts may influence monetary policy decisions in the coming months.
Overall, the Fed’s decision to keep the key interest rate stable shows that the central bank is pursuing its monetary policy strategy independent of political pressure and is focused on economic indicators. This stability can have both positive and negative effects on various market segments, depending on investors’ expectations and strategies.