US Fed Cuts Key Interest Rate By 0.25%, Sending Stocks Tumbling.

Washington, United States: The US Federal Reserve on Wednesday cut the interest rate by a quarter points and signalling a slower pace of further rate cuts, sending the financial markets into an immediate sharp sell-off effect.

As per expectation, the policymakers have lowered the central bank's key lending rate to 4.25 percent-4.50 percent, as they voted 11 to 1 for this action, according to the statement from the Fed.

Instead, they halved their projection of quarter-point cuts anticipated for next year from an average of four back in September to just two on Wednesday, thereby surprising the markets.

All the major indices of Wall Street closed very much in red while the yields on US Treasurys saw a sudden rise as traders digested the possibility of higher interest rates for the next couple of years.

As far as the chairman Jerome Powell said to reporters on Wednesday, inflation eased "significantly," but this is still at a "somewhat elevated" level compared to the Fed's target of two percent over the longer run.

According to him, he remained "very optimistic" regarding the state of the United States economy, saying that the Fed was now "significantly closer" to finishing its current easing cycle.

It was the last intended interest rate decision that took place before the outgoing Democratic President Joe Biden was replaced by Republican Donald Trump who proposed economic policies like hikes in tariffs and deporting millions of undocumented workers.

Fresh tariffs, according to the nonpartisan Congressional Budget Office (CBO), reduce economic growth and increase inflation.

Amid the victory of Trump in the elections of November, some analysts have already cut back some expected Fed rate cut for 2025 warning that the Fed would be forced to keep rates higher longer than anticipated.

Inflation battle not over

In the past two years, the Fed has made advances in combating inflation through increases in interest rates but without delivering a fatal blow to either growth or unemployment. In recent times, they have started reducing the rates to stimulate demand in the economy and make life easier for the labour market.

For the past number of months, the measurement of inflation preferred by the Fed has budged upward, moving farther from the bank's target, and casting doubt on whether or not the battle with inflation is over.

Higher growth, higher inflation

According to the updated economic forecasts, which were meant to accompany the decision on the interest rates, members of the 19-member FOMC published two quarter-point reductions in interest rates that would take place on average during 2025, roughly halving the number of cuts they expect now.

They further raised their projection for the headline US inflation next year to 2.5%, but do not see the rate returning to 2 percent before 2027.

This year's unemployment rate is expected to be a little lower than the prediction made earlier at 4.2 percent. Then, it will rise a little to 4.3 percent in 2025 and 2026 - a number that at least one analyst said would be overly optimistic.

Samuel Tombs, Pantheon Macroeconomics chief US economist wrote in a note to clients, ‘US Fed rate cut will come faster than expected, as unemployment is on the top of the new forecast’.