Monetary policy US Federal Reserve lowers key interest rate by 0.25 percentage points

The US Federal Reserve (Fed) is lowering its key interest rate for the second time in a row in the face of slowing inflation. This will now be reduced by 0.25 percentage points to a corridor of 4.5 to 4.75 percent, the Fed announced on Thursday evening.

Commercial banks can borrow central bank money at this rate. In September, the central bank of the world's largest economy lowered its key interest rate for the first time since the outbreak of the coronavirus pandemic. It remains to be seen what impact the return of Republican Donald Trump to the White House will have on the Fed's interest rate policy.

Inflation is falling in the USA

The traditional task of the US Federal Reserve is to keep inflation in check. The rate of inflation continued to fall in September - albeit less than expected. Consumer prices rose by 2.4 percent compared to the same month last year. The inflation rate is the lowest since February 2021, having stood at 2.5 percent in August. Inflation is making progress towards the long-term target of 2 percent, the monetary authorities explained.

In addition, the latest indicators show that the economy is continuing to grow solidly. The labor market has cooled slightly. Unemployment has risen slightly, but is still low, they added. The interest rate decision was taken unanimously.

The Fed had already signaled further interest rate cuts this year in September. For the coming year, the US central bank is assuming an average key interest rate of 3.4 percent. The Fed will not publish new forecasts until December - and should then also take Trump's new presidency into account.

Trump wants low interest rates

The central bank works independently of the US government. However, Republican Trump repeatedly clashed with the Fed during his time in the White House, proposing interest rate cuts and heavily criticizing Fed Chairman Jerome Powell. There are fears that he will try to interfere in monetary policy decisions again after his return to the White House in January.

In addition, Trump is planning high tariffs and tax cuts. It is expected that this policy will cause inflation to rise again. In view of these prospects, it remains to be seen whether the Fed will continue to cut interest rates significantly - or whether it will continue to pursue a high-interest policy.

High interest rates curb demand. Private individuals and businesses are spending more on loans - or borrowing less money. Growth declines, companies cannot pass on higher prices indefinitely - and ideally the inflation rate falls.

Powell in office until 2026

In his second term of office, Trump is likely to at least try to push the Fed to cut interest rates. The staff at the central bank is also likely to change in the long term. During his time as US President, Trump nominated Powell for his first term as Fed Chairman, but subsequently criticized him for raising interest rates.

He recently said that he would not fire Powell. But Powell's term of office ends in 2026 - at which point Trump can nominate a new Fed Chairman. He had already stated that he would not nominate Powell again.

SDA