The US Central Bank Federal Reserve has cut interest rates by 25 basis points (0.25%). Now interest rates will remain between 4.25% and 4.50%. This is the third time this year that the Fed has cut interest rates. Earlier, on September 18 and November 8, the Fed had cut interest rates by 25 (0.25%) and 50 basis points (0.50%).
Key Points
- The Federal Reserve has cut interest rates for the third and last time this year.
- In 2025, the Fed is expected to cut interest rates twice, down from the four cuts previously estimated.
- Policymakers have forecast an increase in inflation in 2025, which could reach 5% by the end of the year.
Federal Reserve System
- The Federal Reserve System (FRS) is the central bank of the US.
- It is also known as the “Fed” and is one of the most influential financial institutions in the world.
Establishment:
- The Fed was established on December 23, 1913 under the Federal Reserve Act.
- The act was signed by then-President Woodrow Wilson in response to the financial crisis (1907).
- Prior to this, the US was the only major financial power that did not have a central bank.
- Purpose of establishment: To provide the country with a safe, flexible and stable monetary and financial system.
Structure
- The Fed has a 7-member board.
- It consists of 12 Federal Reserve Banks, which operate in different districts and have their own presidents.
Reasons for cutting interest rates
- Threat of economic recession: Consumer spending and industrial production have declined in the US in recent months.
- Global uncertainty: Tensions in international trade and other global factors influenced this decision.
- Unemployment: The slow pace of improvement in the labor market prompted the Fed to reduce interest rates.
Inflation in the US
- Annual inflation: 7% (up from 2.6% in October).
Main reasons
- Food prices rose (4% vs. 2.1%).
- Smaller decline in energy costs (-2% vs. -4.9%).
- A slight decline in new vehicle prices (-7% vs. -1.3%).
- Housing costs rose 3%, accounting for 40% of the monthly increase.
Decreases
- Housing inflation eased (7% vs. 4.9%).
- Transportation inflation fell (1% vs. 8.2%).
- Used vehicle prices fell further (-4%).
Impact on India
- Increase in foreign investment: Due to the fall in interest rates in the US, foreign investors can take cheap loans from the US and invest in India.
- Strengthening of Rupee: Due to the fall in US interest rates, the dollar may weaken, which may strengthen the Indian Rupee.
- RBI’s interest rate decision: The interest rate cut by the US Federal Reserve will not directly affect India.
- The Reserve Bank of India (RBI) focuses mainly on inflation control and GDP growth, not on the unemployment rate.