- The Federal Reserve has made its first interest rate cut since December.
- The capital rate has dropped from 4.5% to 4.25%, which many had anticipated.
- The Summary of Economic Projections (SEP) indicates fewer rate changes ahead, leading to a shift in risk appetite.
In what many expected, the Federal Reserve has opted for a quarter-point rate cut. This initial reduction comes after nine months of waiting, and now investors are turning their attention to how many more rate cuts might be on the horizon for 2025.
The SEP reveals that Federal Reserve officials are considering additional rate adjustments. According to DOT plots, a significant number of policymakers anticipate the rates to settle between 3.5% and 3.75% by year-end, suggesting the possibility of two more cuts by December.
As a result, EUR/USD climbed, nearing the 1.1900 mark, reflecting its highest level in four years.
More updates to follow…
Explore further Fed news: The Federal Reserve reduces rates from 4.00% to 4.25%
EUR/USD 5 Minute Chart
FAD FAQ
US monetary policy is largely influenced by the Federal Reserve System, which aims for price stability and full employment. Adjusting interest rates is a key tool for pursuing these objectives. When inflation soars above the Fed’s 2% target, interest rates rise, making borrowing more expensive and strengthening the US dollar. Conversely, if inflation dips below 2% or unemployment is high, the Fed may lower rates to stimulate borrowing.
The Federal Reserve convenes eight times a year for policy meetings where the Federal Open Market Committee (FOMC) evaluates the economy and makes crucial monetary policy decisions. This committee includes 12 federal officials—seven from the Governor’s Committee, the chairman of the Federal Reserve Bank of New York, and four of the remaining 11 Regional Reserve Bank presidents, serving on a rotating basis for one-year terms.
In dire situations, the Federal Reserve may resort to a policy known as Quantitative Easing (QE). This approach significantly boosts credit flow in the financial system and is typically employed during crises or periods of low inflation. It was the strategy used during the financial crisis of 2008, where the Fed printed more money to purchase high-quality bonds, often weakening the value of the US dollar.
Quantitative Tightening (QT) is essentially the opposite of QE, where the Federal Reserve stops purchasing new bonds from financial entities and refrains from reinvesting the principal from maturing bonds. This typically has a positive effect on the value of the US dollar.
