Fed rate cut diverges from global central bank strategy
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Why did the Federal Reserve decide to cut interest rates?
Spare a thought to all you monetary policy types for Jay Powell and the gang. You've got one tool. You can't do two things at once. From American Public Media, this is Marketplace.
In Los Angeles, I'm Kyle Risdell. It is Wednesday today, the 10th of December. Good as always to have you along, everybody. That tool that the Federal Reserve has, monetary policy, interest rates, the two jobs, maximum employment, and stable prices. The challenge in late 2025? As I mentioned, and as I've mentioned here before, the situation is that our two goals are a bit in tension. Yes, yes, you have mentioned that. Interestingly, everyone around the table at the FOMC agrees that inflation is too high and we want it to come down and agrees that the labor market has softened and that there's further risk. All right. So what's the problem? Where the difference is, is how do you weight those risks? And what does your forecast look like?
And where do you ultimately where do you think the bigger risk is? You tell us. We made a decision today. We had, you know, nine out of 12 supported it. So fairly broad support. But it's not like the normal situation where everyone agrees on the direction and what to do. It's more spread out. And I think that's only inherent in the situation. So here's the way it shook out. A quarter percentage point cut, as you've heard. Nine votes for that. Two wanted no cut. One wanted a deeper cut. More dissent than usual, but about what everybody had been expecting, honestly. Three questions on artificial intelligence, which is a lot for a Federal Reserve press conference. Inflation and tariffs, of course, made an appearance, too.
It's really tariffs that's causing most of the inflation overshoot. And we do think of those as likely to, in the current situation, as likely to be a one-time price increase. Our job is to make sure that it is, and we will do that job. But right now, you've got this difficult balance, and there are risks to both sides. There's no risk-free path. Words to live by. There is no risk-free path. Wall Street today. Traders, well, they do love them some rate cut talk. We will have the details when we do the numbers.
So a cut today, another cut in 2026, maybe two. But we are starting to see the Fed's policy diverge from other central banks around the world. Over the past couple of days, there have been suggestions from the central banks of Canada, Australia and the Eurozone that they might be done cutting rates for now, might even raise soonish. Marketplace's Justin Ho spent some time today trying to figure out why other central banks are feeling that upward pressure on rates and what that might mean here.
It's a little unusual when central banks move in opposite directions.
Because normally the business cycle in different regions moves together and everybody's doing the same thing at the same time.
Harvard economics professor Ken Rogoff says the moment we're in right now is really no different. Central banks around the world are feeling pressure to either hold rates steady or even raise them. And not just because of persistent inflation.
The fracturing of the global trading system puts upward pressure on interest rates. Weak immigration puts pressure on interest rates. spending on the military puts pressure on interest rates.
And if the Fed keeps cutting rates while other central banks don't, Rogoff says investment will flow to the highest bidder.
Capital markets are global, so the money is going to move to where the rate of return looks good.
The European Central Bank is likely to hold rates steady going forward, says Ben Shoesmith, senior economist at KPMG.
They've done a fairly good job bringing inflation back down to their target levels. And they've also just recently upgraded their forecast for GDP growth.
Shoesmith says the Bank of Canada is likely to hold off on rate cuts too, also thanks to better-than-expected growth. Meanwhile, Australia's central bank has been concerned about inflation.
For the time being, as they expect there to be this short bump up of inflation early in 2026, they're likely to sit on it for a bit.
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