The Federal Reserve made its expected move on Wednesday when it cut its benchmark federal funds rate by 25 basis points to 5.00-5.25%. It will be the last time since March 2020 that the central bank instituted the cut in the rate, and the change in the monetary policy agenda to promote growth with fears of a slowdown.
Jerome Powell, speaking to the press after the meeting, stressed that the fate of cutting rates was not the start of a long process of lowering interest rates. But, he kept the door open saying that the Fed ‘would provide additional accommodation as needed to maintain the expansion.’
The decision to cut the rate was made at a time when economic signals posted are somewhat mixed. The US labor market has remained resilient with the unemployment rate not far from the lowest in 50 years yet, inflation has remained below the Fed’s target of 2%. Global growth issues, specifically trade war and geopolitical risks have also influenced the Fed.
Financial markets welcomed the news, as indicated by gains in large caps and new record high on major U.S stock indexes. Meanwhile, S&P 500 finished 0.8% higher and the Dow Jones Industrial surged 0.7%. Tech-heavy Nasdaq Composite was higher by 1.1%.
The cut in interest rates is assumed to bring about multi-sector impacts to the economy. For the consumers, it could translate to cheaper costs on Mortgages, auto loans and the credit cards. Firms could also presumably reap lower costs to borrow thereby likelihood to invest and provide employment.
However, the saver may now start receiving lower interest on their deposits because banks may have changed their interest rates following the direction given by the Fed. This could particularly affect retirees and other people who survive on interest earnings from their savings account and certificates of deposit.
This move by the Fed has equally affected other world markets and currencies in one way or another. Implementation of guidelines was marked by some violations: the US dollar depreciated against major currencies, as global interest rates determine the demand for the currency.
However, some economists and market observers have criticised the Federal Reserve’s decision to move through this KNReserve Bank has cut the Fed funds rate saying that the US economy is rather robust. Many observers said that the change might cause new asset bubbles and restrict the Fed’s further actions in case of future economic difficulties.
In the future, market participants are going to focus on the economic indicators and CNB statements that will provide signals on further changes in the key rate. The next Fed’s policy meeting will take place in September and now the probability of delivering another rate cut by the end of the year is quite high.
The rate cut is also happening under constant pressure from the head of state, Donald Trump, who has been demanding that interest rates should be reduced as a way of spurring on economic growth. But when it comes to fostering independence of the Fed from political dictation, Powell has remained firm and this pressure has lately put the independence of the central bank into question.
There is even more political pressure for the Fed’s monetary policy actions with the U.S. heading into an election year in 2024. As the central bank is to encourage economic growth while at the same time be an independent body it will have to balance between the two goals.
Altogether one might assert that the decision of the Federal Reserve regarding interest rates change is a very important shift in the monetary policy. Although in the short term it could produce positive effects in the financial markets the benefit for the rest of the economy is still questionable. This will make all waiting for the next actions by the Fed, and how they will influence growth, inflation, and other financial factors where the global economy remains unpredictable.
