The US Federal Reserve (Fed) has cut interest rates in America from 4.5% to 4.25%, as forecast by The Common Sense’s Economics and Policy Editor, Bheki Mahlobo.

In its attached Summary Economic Projections (SEPs), the Fed also lifted its growth projection for the American economy. At its June meeting, the Fed’s SEPs had predicted US economic growth of 1.4% for 2025, lifting to 1.6% in 2026 and 1.8% in 2027. Its latest data lifted those forecasts to 1.6%, 1.8% and 1.9%. The 2025 unemployment estimate was left constant at 4.5% but forecast to decline to 4.4% and 4.3% into 2028. This was a marginally better outlook than that of June.

Inflation was expected to hold at 3% this year, in line with the June forecast, and then to fall to 2.6% and 2.1% for 2026 and 2027. The lending rate prediction was that the federal funds rate (essentially the interest rate) would average 3.6% this year, down 0.3 percentage points relative to the June forecast. The rate was expected to fall to 3.4% and 3.1% into 2028.

In a statement, the Fed said “in considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks”. It also said that it “will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities [and that] [it] is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective”.

Bheki Mahlobo told The Common Sense from California last night that the Fed’s rates prediction was “very dovish but that US equity markets, that had already priced the cut, may, despite their extreme highs, extend gains as investors seek yield”. Mahlobo expected the dollar to weaken somewhat on the Fed outlook, placing the rand in a position to strengthen towards 17 to the US dollar, which he said, “might come as a relief to South African consumers, as well as taking some of the pressure off South Africa’s central bank in alleviating the risk of imported inflation, with the implication that South Africa’s bank might squeeze in a 25 basis points rate cut of its own”.