US Economy Receives Boost with Significant Interest Rate Cut
US interest rates have been reduced for the first time in over four years, by more than expected, signaling concerns about the weakening economy of the world’s largest economy.
The Federal Reserve, the US central bank, has lowered interest rates by 0.5 percentage points to a range of 4.75% to 5%.
In contrast to the UK, the US interest rate is a range used to guide lenders rather than a single percentage.
Read more: What next for interest rates?
The Fed’s primary goal is to reduce inflation to 2% and has been using interest rates to control the flow of money in the economy by increasing borrowing costs since 2022, following the Ukraine/Russia price shock.
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Recent data indicates that the Fed is close to achieving its inflation target, with the primary measure reaching 2.5% in August, the lowest rate in three years.
However, concerns about a weakening economy arose last month as job creation data raised fears of a recession.
In its statement, the Fed indicated confidence in both the inflation and growth outlooks, but expressed concern about a slowdown in the pace of hiring.
Only one member of the rate-setting committee dissented on the 0.5 percentage point reduction. Financial markets were divided on whether a 0.25 point decrease would be more appropriate.
Following the decision, US stocks saw a rally, with both the Dow Jones Industrial Average and the S&P 500 rising by more than 0.5% from previously flat positions just before the rate decision was announced.
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The dollar was trading a cent lower against the pound at $1.32.
Some market analysts believe the Fed’s response indicates that Fed chair Jay Powell and policymakers were slow to react to the employment slowdown.
Powell stated, “We will be making decisions meeting by meeting, based on incoming data and the evolving outlook, the balance of risks… it is a process of adjusting our policy stance from where it was a year ago, when inflation was high and unemployment low, to a more appropriate position given our current situation.”
Federal Reserve Chairman Jerome Powell Pic: AP
“This process will take time,” he added, emphasizing that there is no rush.
Michael Sheehan, fund manager of fixed income at EdenTree Investment Management, said: “Starting this rate cut cycle with a 50 basis point reduction will confirm the belief that the Fed was lagging behind.”
“Any doubts that this cycle would be less significant than previous ones have been dispelled.
“We expect this larger cut to boost risk assets in the short term. The focus for markets and the Fed will be on how the softening labor market will evolve.
“Powell is aiming for aggressive early action to prevent substantial weakening and achieve a soft landing.”
What about the UK?
Meanwhile, the Bank of England is meeting on Thursday to decide on its own interest rates.
Although the Bank’s decision is expected to hold rates based on UK economic data, it may be influenced by the US rate reduction.
A significant cut from the Fed usually weakens currencies, which could benefit the pound.
While this is good news for travelers and importers paying for goods like oil, it could negatively impact exporters by reducing the value of their products and making them less competitive.
Lower exports can lead to lower inflation, making a rate cut by the Bank more likely.
