Decision comes with massive Canadian implications following severe weakening of the Canadian dollar
The US Federal Reserve has made its final interest rate decision of the year electing to cut its overnight interest rate by a further 25 basis points. Futures markets had priced in the cut as a near-certainty going into the FOMC meeting.
In contrast to other developed economies, especially Canada, the Fed is sitting on a stronger economic foundation. GDP growth in the United States is sitting at around 3 per cent and the US labour market remains quite tight. Inflation, however, has stayed stubbornly above the Fed’s 2 per cent target rate.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” a press release announcing the cut reads. “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
Inflation expectations could prove problematic for the US Fed with the incoming administration of Donald Trump. Through proposed tariffs, fiscal spending, and curbs to immigration analysts have predicted the new administration may pour fuel on the inflation fire.
The move follows a ‘jumbo’ 0.50 per cent cut by the Bank of Canada last week. This leaves the Bank of Canada with a policy interest rate fully one per cent lower than our neighbours to the south. This policy divergence could have significant implications for the value of the Canadian dollar, which slipped below $0.70 USD on Tuesday for the first time since the pandemic.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” the release reads. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.”
