The much-awaited economic decision by the US Fed has finally been unveiled. Key interest rate has been reduced by 50bps in its first since 2020 aggressively reducing the borrowing costs before the presidential election. With inflation sobering, this move signals the beginning of the end of a higher interest regime.
Policymakers voted 11-to-1 in favour of lowering the central bank’s rate to 4.75% and 5%. Fed Chair Jerome Powell highlighted that while the move might appear aggressive, it was needed due to easing inflation and growing job market concerns. This move will bring relief to US borrowers who have been dealing with the highest interest rates in more than 2 decades. This cut is larger than what analysts predicted a week ago. Forecasts signalled that rates might further correct by another 50bps by the end of this year. The Fed Chair justified the action by stating that the high borrowing costs owing to increased rates must not end up hurting economic growth. The Fed started raising rates in 2022 to cool down inflation and stabilise prices which was gaining the fastest momentum since the 1980s. Inflation dropped to 2.5% in August, moving closer to the Fed’s 2% target for the 5th consecutive month. Historically the Fed had announced rate cuts to a magnitude of 50bps during moments of crisis – the 2008 financial markets crash and the coronavirus pandemic. Many experts believe that a smaller cut would have been conventional while the larger cut although stimulates demand brings in with itself the risk of increased inflation.
A lot has also been said about the impact of rate cuts on the US elections slated for November 2024. The Fed currently enjoys independence for its dual mandate – to tackle inflation and employment. There have been some elements of criticism by Mr Trump over the “lack of say” on interest rate matters to which the Fed Chair has responded that “Independence was good for the public”. Nevertheless, the current rate cuts will certainly have political implications given the cost of living for US consumers.