US cuts interest rates despite inflation risk

Inflation, which measures the pace of price increases, stood at 2.7% in the US in November – up from 2.6% a month earlier.

Lower interest rates stoke economic activity by making it easier to borrow, encouraging businesses to invest or expand and households to spend on items such as cars. But if demand rises, higher prices typically follow.

Fed officials – who want to see inflation of about 2% – have said they are aware of the risks.

On Wednesday, forecasts released by the bank showed policymakers adjusting their plans to cut rates less next year than anticipated just three months ago.

The bank’s key rate is now expected to fall to 3.9% by the end of next year, instead of the 3.4% previously predicted.

John Ryding, chief economic advisor at Brean Capital, said he thought it would have been wiser for the Fed to hold off on a cut at this meeting, even if it risked upsetting market expectations.

“There has been enormous progress made from the peak in inflation to where the US is now and it risks giving up on that progress, possibly even that progress being partially reversed,” he said. “The economy looks strong… What’s the rush?”