On the 17th (local time), the U.S. Central Bank, the Federal Reserve (Fed), cut the benchmark interest rate by 0.25 percentage point (p). The interest rate gap between Korea (2.50%) and the United States narrowed to 1.75%p at the upper end. It was the first rate cut since the Donald Trump administration took office, and the Fed signaled two more cuts this year.
◇Rate cut after 9 months
Wrapping up a two-day Federal Open Market Committee (FOMC) meeting, the Fed said it decided to lower the benchmark rate from 4.25–4.50% to 4.00–4.25%. After resuming rate cuts in September last year for the first time in four and a half years and cutting through December, the Fed held rates steady repeatedly at the start of this year. This is the first time in 9 months that the Fed has cut rates.
In its FOMC statement, the Fed said, "Recent indicators suggest that the growth of economic activity moderated in the first half of this year," adding, "Job gains have slowed, and the unemployment rate has risen slightly but remains low. Inflation has risen and remains somewhat elevated."
It went on, "Uncertainty about the economic outlook remains high," explaining the rationale for the rate cut by saying, "We judged that downside risks to employment have increased." In a press conference after deciding to cut the benchmark rate, Chair Jerome Powell also said, "As downside risks to employment have increased, the balance (between inflation risks and employment risks) has shifted," adding, "We judged it appropriate to take another step toward a more neutral policy stance."
As in July, the vote on the rate decision at this FOMC was not unanimous. Steven Myron, a new Fed governor appointed by President Trump and sworn in the previous day (who also serves as Chairperson of the National Economic Council), voted for a 0.50%p cut, while the other FOMC members voted for a 0.25%p cut. The "big cut" (a large reduction of 0.50%p or more) that President Trump consistently demanded and some in the market expected was not a major consideration for Fed members.
◇Likely two more cuts within the year
The Fed put the median year-end projection for the benchmark rate at 3.6%. That is down 0.3%p from the 3.9% announced in June, suggesting two more 0.25%p cuts are likely this year. Two FOMC meetings remain this year, on Oct. 28–29 and Dec. 9–10. Of the Fed's 19 commissioners, 11 expected additional rate cuts within the year.
The Fed raised its forecast for this year's U.S. economic growth rate (real gross domestic product growth) to 1.6%. The previous projection, announced in June, was 1.4%. Compared to then, the personal consumption expenditures (PCE) price index inflation rate remains at 3.0%, the core PCE price index excluding volatile food and energy remains at 3.1%, and the unemployment rate remains at 4.5%.
It expected inflation to persist for the time being. At a press conference, Powell said, "Increases in goods prices (due to tariff) account for most of this year's rise in inflation," adding, "At this point, the effect is not very large, but we expect it to continue to accumulate over the remainder of this year and into next year." However, he noted that the pass-through of tariffs to consumers via higher goods prices has so far appeared only modestly.