On Wednesday, the Federal Reserve slashed its benchmark interest rate by an exceptionally significant half-point to range between 4.75% and 5%. This was a drastic shift from the more than two years of high rates, which both helped control inflation and made borrowing extremely costly for American consumers.
The Fed’s first rate reduction in over four years is a reflection of its newfound emphasis on supporting the labor market, which is evidently slowing down. The Fed’s move, which comes only weeks before the presidential election, also has the potential to destabilize the economy as Americans get ready to cast their ballots.
The Fed reduced rates on Wednesday for the first time since 2020, but it won’t be the last. The Fed’s rate-setting committee members anticipate borrowing costs to decline by an additional half a percentage point this year and a full point the following year, on average. Three months ago, committee members had not anticipated such a swifter fall.
A significant turning point in the Fed’s two-and-a-half-year fight to control inflation has been reached with the move to decrease interest rates. In an attempt to rein in demand and stabilize prices, the central bank started hiking rates in March 2022. Interest rates reached their highest point in almost 20 years last summer, rising to between 5.5% and 5.25%.
What is the major cause of the Rate Cut?
The Fed is joining the rate-cutting party a little later than other central banks. Many banks in emerging nations, as well as those in Europe, the UK, New Zealand, and Canada, have already lowered interest rates. Regarding the Fed, it adjusts rates based on two variables: employment and inflation.
What will be the Global Impact?
The change will most immediately impact Americans. However, central banks that have dollar-denominated currencies—like Hong Kong and many Gulf states—often connect their rate choices to the Fed, so borrowers in such nations will also be impacted. A cut is probably excellent news for the numerous foreign investors in the US stock market.
