Vigilance and coordination needed to address impact of Fed's interest rate cut

As was widely expected, the US Federal Reserve cut its key interest rate by 25 basis points on Wednesday citing concerns over rising unemployment, and indicated it would do so twice more this year. This is the de facto US central bank's first rate cut since December 2024. It lowers its short-term rate to a range between 4.0 percent and 4.25 percent.

The decision could not have been an easy one to make. With the US administration's high tariffs fueling inflation risks and the US job market weakening, the US' principal monetary policymaking body faced competing pressures. The Fed typically holds rates at higher levels to rein in inflation — which remains stubbornly elevated in the US and is expected to end the year at 3 percent, well above the Fed's 2 percent target — yet to support the labor market it also has to slash rates.

So the Fed faced a dilemma: cutting rates too aggressively could trigger an inflation rebound, while cutting too slowly may fail to effectively support the job market. The situation leaves it with little room for maneuver. In Fed Chair Jerome Powell's words, the Fed now is in a "meeting-by-meeting situation" when it comes to further rate reductions.