The entire planet was watching for a decision to come out of the latest FOMC meeting. The Federal Reserve did not disappoint and announced the third consecutive cut in its benchmark interest rate, by a quarter of a percentage point to 4.25-4.50%, in line with market expectations.

Although the announcement was in line with market expectations, one detail caused tensions to rise: the Fed expressed caution going forward and hinted that the process of rate cuts could be slower next year.

The decision was not unanimous at the FOMC. Governor Beth Hammack spoke out against a further cut amid rebounding inflation rates.

The central bank, which revised its macroeconomic forecasts, noted anyway that it envisages only two rate cuts of a quarter percentage point each in 2025, less than the four cuts announced so far. It also raised its inflation forecast for next year from 2.1% to 2.5%.

Fed Chairman Jerome Powell told a press conference that while "inflation has eased significantly over the past two years (...) it remains relatively high" relative to the Fed's "long-term target of 2%".

He also noted that the agency is "significantly close" to closing its cutting cycle as it nears the "neutral rate," the neutral number for the economy that is neither driven nor held back by benchmark interest rates.

In this context, the central bank expects the 2% inflation target to be reached only by the end of 2026.

These announcements surprised Wall Street, which gave up the gains of the day and ended the day down sharply: the Dow Jones lost 2.58%, the technological Nasdaq 3.56% and the S&P 500 2.95%. The Fed managed to control inflation thanks to a prolonged rate hike over the past two years, after which it began to ease monetary policy to boost demand and support the labor market. High rates make credit more expensive and discourage consumption and investment, thus reducing pressure on prices. Low rates generate the opposite effect.

The consumer price index (CPI) rebounded to 2.7% annually in November. Meanwhile, the other measure of U.S. inflation, the PCE, the Fed's most widely followed index, will be released on December 20.

The unemployment rate will remain low and virtually stable at 4.3%, according to the Fed. This is just 0.1 percentage points above the figure forecast for the end of this year.

As such, persistent inflation should not weigh on economic activity in light of the central bank's data.

The return of Trump

This is the Fed's last monetary policy decision before Donald Trump comes to power in the United States in January.

The Republican proposes across-the-board tariff hikes and the mass deportation of millions of irregular workers.

These plans, combined with the recent rebound in inflation data, are generating fears among analysts. Many of them expect higher rates to remain in place for longer than expected in order to contain price increases.

According to a survey of some 500 U.S. companies conducted by staffing firm Resume Templates, 82% of companies expect to increase their prices if new tariffs are put in place by the incoming administration.

Trump has already announced tariffs of 25% against neighboring Canada and Mexico, which could drive consumer prices higher.

It is the economy...

This is a sensitive issue for all Latinos, not only for those living in the United States but for those throughout the continent. What happens to the U.S. economy will be decisive in the fate of the economies of all the countries in the region.

In general, lower interest rates imply a lower cost of credit, which becomes a boost to the economy.

However, as the legal principle states, the Fed's priority is to keep inflation in check and that is why the markets were upset to learn that the institution will no longer keep cutting rates at the pace it had been doing.

As a result, credit for individuals and businesses is expected to remain at current levels, which will keep the brakes on many consumption and investment decisions.

On the other hand, Latin American countries are facing different challenges in defining their rate levels. Central Banks such as those of Colombia and Brazil have the fiscal issue in their sights, as these two governments have been showing great interest in increasing their deficits to pay for their expansive social policies. This generates tension, because in addition to the fact that governments generate competition for money in the capital markets, macroeconomic imbalances are generated that can only be addressed through harsh adjustments.

In a scenario of flat interest rates in the United States, business decisions are conditioned by the differential in the cost of money between Latin America and the rest of the Americas and by the possible macro instability caused by government fiscal problems.

The economic story of 2025 is going to be very interesting.

With information from AFP