US Federal Reserve cuts interest rates in a split decision
On December 10, the Federal Reserve (Fed) announced a 25-basis-point cut in its overnight lending rate, setting the new target range at 3.5 to 3.75%. This marks the third interest rate cut of the year so far but the decision was far from unanimous. Some policymakers favoured cuts to counter potential weakness in the labour market, while others warned the easing has gone far enough and could aggravate inflation.
The split votes against last week’s decision highlight the fundamentally different perspectives in the Fed regarding the economic outlook. Although there was a general agreement that the central bank should lower rates to end the year, the contrasting interpretations of where the US economy is headed suggest that reaching consensus will remain challenging.
During a press conference, Fed chair Jerome Powell emphasised that the Fed remains in a “challenging” position, with both sides of its dual mandate; supporting employment and maintaining price stability, pulling in opposite directions. Adding to the uncertainty is the anticipation of new leadership at the central bank, which introduces another layer of complexity.
Meanwhile, the number of Americans filing new applications for unemployment benefits posted the largest increase in nearly four-and-a-half years last week. According to Labour Department data released on December 11, initial jobless claims in the US rose by 44,000 from the previous week to reach 236,000 for the period ending December 6, well above market expectations and breaking a four-week streak of declines. The surge follows a holiday-related dip that pushed claims to their lowest level in more than three years.
Economists, however, cautious against reading too much into the numbers, noted that claims data tend to be highly volatile during the holiday season and are difficult to adjust for seasonal patterns. Despite the outsized weekly gain, the biggest since March 2020, analysts say the increase does not signal a significant deterioration in labour market conditions. Instead, they expect fluctuations to persist through year-end as seasonal factors continue to distort the data.
UK economy in unexpected decline
Finally, the UK economy posted an unexpected decline in October, shrinking by 0.1% in October, according to data from the Office for National Statistics (ONS). Economists had been expecting a modest growth of 0.1%, making the contraction a surprise ahead of the Budget announcement. The ONS highlighted that services output stagnated, while construction output fell 0.3% and production output fell 0.5%, “largely because of a fall in the manufacture of motor vehicles, trailers and semi-trailers in this period”.
After four consecutive months without economic growth, economists said the latest figures would probably strengthen expectations for a Bank of England interest rate cut this week, amid fading inflationary pressures, fears over the sluggish outlook and rising unemployment.
This article does not constitute legal and, or financial advice and is being issued for information purposes only by Bank of Valletta plc, 58, Zachary Street, Valletta. Bank of Valletta is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap.371 of the Laws of Malta) and the Investment Services Act (Cap.370 of the Laws of Malta).
