At its meeting on 17-18 December 2024, the US Federal Reserve (Fed) cut its key interest rates by 25 basis points, in line with market expectations. This decision brings the total interest rate reduction to 100 basis points for the year, thus aligning US monetary policy with that of the euro area.

However, the Fed signalled a more cautious approach going forward, indicating that it plans to slow the pace of rate cuts in 2025, with a reduction of only 50 basis points, two fewer cuts than expected in September. The move reflects the central bank’s concern about overly slowing economic growth, despite improved GDP forecasts, now estimated at 2.5% for 2024 and 2.1% for 2025.

The Fed’s decision was not unanimous within the committee, with some members expressing reservations about the speed of the rate cuts. The divergence underscores the challenges the central bank faces in balancing fighting inflation with supporting economic growth.

Financial markets reacted negatively to the announcement, as investors had hoped for more aggressive rate cuts. The Fed’s cautious stance also weighed on the Christmas rally, sending stock indices lower.

The Fed also remains alert to political uncertainties, including the Trump administration’s unpredictable trade and immigration policies, which could rekindle inflation and dampen growth in the world’s largest economy. The strained relationship between Fed Chairman Jerome Powell and President Trump adds an additional layer of uncertainty about the future direction of monetary policy.