Federal Reserve cuts interest rates by half percentage point in first reduction since 2020
The US Federal Reserve has lowered interest rates for the first time since 2020, cutting them by half a percentage point to a range of 4.75 per cent to 5.00 per cent. This move aims to support the world's largest economy as inflation cools down, with the central bank seeking to lower borrowing costs and stimulate growth.
"With the battle against inflation seemingly under control, we believe the time has come to adjust rates to better support the economy," said Fed Chairman Jerome Powell, who had hinted at the possibility of a rate cut as early as August. The reduction came as no surprise to most analysts, who had widely predicted the move. However, there had been some debate over whether the cut would be a smaller step of a quarter percentage point or the more aggressive half-point reduction.
Previous adjustments
The last adjustment to the interest rate occurred in July 2023, when the Fed raised rates to a range of 5.25 per cent to 5.50 per cent, the highest level since 2001. The central bank maintained this elevated rate for over a year in an effort to drive inflation back toward its 2 per cent target. This approach has had a visible impact: inflation in the US settled to 2.5 per cent in August, down from 2.9 per cent in July, marking the lowest inflation rate since February 2021. However, core inflation, which excludes volatile food and energy prices, remained relatively high at 3.2 per cent.
The Fed's policymakers were unanimous in their decision to lower rates, though not all agreed on the size of the cut. "One policymaker preferred a more cautious approach with a quarter-point reduction," the central bank noted in its report.
A view from Europe
Unlike the European Central Bank (ECB), which reduced interest rates twice this year, the Fed maintained its high rate for a longer time. This was necessary due to persistent inflation and a faster-growing economy in the US.
Additionally, the Fed's mandate differs from the ECB in that it must fight inflation while ensuring high employment for Americans. Interest rates that are too high slow down the economy and, therefore, the labour market. The ECB focuses primarily on price stability.
What makes this rate cut particularly significant is its timing ahead of the presidential election. In the US, where short-term interest rates heavily affect mortgages, car loans and credit cards, an interest rate cut quickly boosts purchasing power. This economic lift could benefit voters, which is why presidential candidate Donald Trump suggested waiting until November to lower rates.
US Federal Reserve chairman Jerome Powell holds a press conference in Washington, DC, on 18 September, 2024. ©PHOTO MANDEL NGAN / AFP
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