US cuts interest rates despite inflation risk

The US central bank has cut interest rates for a third time, despite concerns that the move will deliver a boost to the economy that risks re-igniting price inflation.

The decision was expected, setting the Federal Reserve’s key lending rate in a target range of 4.25% to 4.5%.

That is down a full percentage point since September, when the bank started lowering borrowing costs, citing progress stabilising prices and a desire to head off economic weakening.

Reports since then indicate the job market has been more resilient than expected while price rises have continued to bubble.

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?”