Lucknow Press
The decision on Fed rate cut in America was finally taken as was most expected. The Federal Reserve on Wednesday aggressively cut interest rates by half a percent. This is the first announcement of interest rate cut since March 2020.
The 0.50 point rate cut paves the way for lower borrowing costs on everything from mortgages to credit cards.
This is a significant milestone for the US central bank’s historic inflation fight, which kept interest rates at a 23-year high for more than a year. US President Joe Biden acknowledged the Fed’s success at such a critical juncture, saying in a statement on X that “we have just arrived at a critical moment.”
Meanwhile, the stock market fluctuated after the Fed’s announcement of this decision and the Dow Jones eventually closed slightly weaker.
Not everyone agrees on rate cut
The decision to cut interest rates by half a point was not unanimous. It sends a message to the world that US central bankers feel the need to provide immediate relief to the US economy from the increased cost of borrowing, especially given that there have been strong calls in recent days for the Fed to begin the rate cut cycle aggressively.
Yet Fed Chairman Jerome Powell said in a press conference that the central bank is “not behind” the curve and that the Fed’s decision to cut rates by half a point is “a sign of our commitment” to not fall behind in responding to the reality of the economy.
Fed Governor Michelle Bowman has consistently expressed concern about price pressures. She was the only dissenter, who instead supported a quarter-point cut. This was the first dissent on a rate cut by a Fed governor since 2005.
Fed officials have called for more rate cuts by the end of the year in their latest economic forecasts, while in June they had forecast a single rate cut in 2024. Central bankers also expect the unemployment rate to rise to 4.4% this year, up from the current rate of 4.2% as of August.
The fight against inflation
Despite the Fed’s aggressive action on Wednesday, and despite heavy pressure from Wall Street and politicians, the central bank’s fight against inflation appears to be paying off so far. Inflation remains well below the 40-year highs seen in the summer of 2022, and all without a recession. The significant progress seen since then is not just due to higher interest rates, but also due to the US economy’s gradual recovery from the severe pandemic disruption.
The Fed has indeed walked a fine line in reducing price pressures without hurting the US job market, which is an extremely difficult task because raising interest rates works by deliberately cooling the economy. That tool used by the Fed can generally be thought of as a sledgehammer rather than a scalpel.
There is a bigger fear in the job market than inflation
Yet despite the drop in inflation, anxiety remains, mostly centered around the future of the job market. Rather than the possibility of inflation stabilizing or flaring up again, anxiety about the job market remains. That’s why some have called on the Fed to begin cutting rates aggressively. The unemployment rate rose relatively quickly last year, and such fears remain. Economists believe that when unemployment starts to rise, it tends to pick up speed and keep rising. A decision on this must be made in time.
This has put the US economy at risk for a potential soft landing. A scenario in which inflation can be controlled without a sharp rise in unemployment. Such an outcome has only happened once in modern history, in the mid-1990s, so the Fed is believed to be heading for a historic achievement.
Federal Reserve Board Chairman Jerome Powell said in a conference call following the Federal Open Market Committee meeting at the Federal Reserve in Washington DC on September 20, 2023, that in view of slow inflation and strong consumer spending, the Federal Reserve announced that it will keep the interest rate steady, keeping the benchmark lending rate in a range of 5.25% to 5.5%.
Powell doesn’t think the Fed is backing down
There was pressure on the Fed to begin cutting interest rates in July, but the Fed did not do so at the time.
Some investors and economists pointed to rising unemployment and how the job market can sometimes turn sour suddenly. The central bank is still waiting for sufficient evidence that inflation is under control, but Powell did say that the weakening job market could delay the timing of the first rate cut. It seems that the slowdown in the job market is moving forward, but it also raises the question of whether the Fed should have cut rates in July? Clearly some investors believe the Fed is running behind schedule and the decision to cut rates by half a point has fueled that fire even more. It is a difficult situation for the Fed and even the fact that the decision was not unanimous casts further doubts on the strength of the Fed’s decision-making. However, Powell does not agree with this notion. He said the Fed is committed only to maintaining the strength of the labor market, meaning officials are not trying to put out fires but are shaping an insurance policy with their rate cuts. That clarification could please Wall Street. Markets may be bullish, but some more details are needed on the job market. “When will investors think the Fed is ahead of the curve and actively exercising its ‘put’? This is the most important question because investors have clearly been asking this all summer and hoping for this outcome,” Jason Draho, head of asset allocation, CIO Americas at UBS Financial Services, said in a recent note.
Fed decision and presidential election
Powell was asked if the Fed’s decision was politically motivated? Is the Fed’s rate cut a political move, especially when the US presidential election is near? His answer is that the Fed is a non-political agency that takes its decisions based on the story told by economic data.
Trump said, if I become president, I will remove Powell from the Fed
Former President Donald Trump has said that if he is elected for a second term, he will not reappoint Powell and will also insist on increasing his role in monetary policy. In response to a question asked by CNN’s Matt Egan, Powell said that such a change would be adverse to the strength of the Fed’s decision-making.
Former President Donald Trump said on Wednesday that the Federal Reserve’s decision to cut interest rates by half a point may be politically motivated.
When asked for his reaction to the interest rate cut during a campaign in New York City, Trump said that it either shows that the “economy is very bad” or that the Fed is “playing politics” in the way it sets interest rates.
Trump said, “I think so many cuts show that the economy is very bad, assuming they are not just playing politics. The economy will be very bad or they are playing politics.
Kamala Harris welcomes the rate cut
Kamala Harris praised the Federal Reserve’s decision to cut interest rates and welcomed the Fed’s decision. Vice President Kamala Harris said the interest rate cut announced by the Federal Reserve on Wednesday is “welcome news”, adding that her focus is on keeping prices low. “While this announcement is welcome news for Americans who have suffered from high prices, my focus is on the work ahead to bring prices down,” Harris said in a statement. Harris promoted her economic proposal, which includes tax cuts for more than 100 million working and middle-class Americans, affordable housing and a plan to impose the first-ever federal ban on corporate price increases on food and groceries.
