Federal Reserve cuts interest rates, but with a caveat

As expected, the Federal Reserve - the US system of central banks - cut interest rates again in December. However, there was an unexpected twist: one of the Fed members voted against the rate cut and wanted to leave interest rates unchanged. This shows that there are doubts within the Fed about the need for further interest rate cuts.

In addition, a more cautious tone was sounded in comments on the interest rate decision. Where previously there were hints of multiple interest rate cuts, the future now depends entirely on new economic data. 

Fewer interest rate cuts in 2025

Due to this cautious approach, the Fed now expects fewer interest rate cuts in 2025 than previously thought. This means the Fed has become more cautious and less inclined to cut aggressively. The central bank is closely monitoring economic developments and does not want to make any hasty decisions that could rekindle inflation.
 
Concerns about inflation rise

The latest interest rate decision and accompanying commentary clearly show that inflation is a growing concern for US central bankers. Inflation is still well above the 2% target, with a slight increase even visible in recent months. This raises the risk that inflation is proving more persistent than thought, and the danger is not over for now.

More news from the US: growing fiscal deficit

Recent data from the Daily Shot shows how difficult it will be for Elon Musk and his colleague Vivek Ramaswamy to get results at the ‘Department of Government Efficiency’. In the first two months of the new fiscal year, the budget deficit rose faster than ever before. Much of the spending is on health, education and social services - items that are difficult to reduce without drastic measures. This makes the challenge of reducing the deficit significant.

China buys gold through unofficial channels

Goldman Sachs confirms that China continues to buy gold, but is increasingly doing so outside official statistics. The investment bank estimates that actual purchases are as much as 10 times higher than what is officially reported. China is among emerging market central banks with relatively low gold reserves and sees gold as a way to strengthen its financial system and become less dependent on the US dollar.

Problems in China's economy
 
Despite growing gold reserves, China's economy continues to perform weakly. House prices continue to fall, causing consumers to spend less. This prolonged malaise has caused economic growth to lag for years. This has led to historically low interest rates and a weakening Chinese yuan.

These developments will be keenly watched by incoming President Donald Trump. He has already announced his intention to introduce new import tariffs against China, which could further increase geopolitical tensions. The trade war threatens to flare up again, which could have negative consequences for the global economy.
 
Europe: falling business confidence

In Europe, business sentiment remains gloomy. In Germany, the key Ifo index, a measure of business confidence, dropped to its lowest level since June 2020 - in the midst of the corona crisis. The fall of the coalition government creates additional uncertainty. New elections are scheduled for February, but it is unclear which parties will form a new government. This political instability threatens to exacerbate economic uncertainty.

In France, companies are also pessimistic, especially in manufacturing. Political unrest and the growing budget deficit are putting pressure on business confidence. France is struggling with a huge mountain of debt, putting upward pressure on French interest rates. The situation is cautiously reminiscent of the European debt crisis of 2011-2012 and puts further pressure on the euro.