US Fed Surprises St With 50bps Rate Cut

Washington: The US central bank on Wednesday announced a large half percentage point cut in the interest rate, higher than expected, the first reduction in four years. It comes down from 5.35 per cent to between 4.75 per cent and 5 per cent.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Federal Reserve said in a statement.

Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 per cent objective, but remains somewhat elevated.

“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 per cent.”

In the run-up to the Fed’s two-day meeting, it was expected to announce a hike but there was speculation if it will opt for a more modest 0.25 percentage or 0.5 percentage point. It chose the latter, signaling urgency in dealing with declining job numbers now that inflation had been reined in.

The rate will reduce the costs of house mortgage, auto loans and other credit-based business, and encourage businesses to expand and step up production, hire more people.

Fed Chair Jerome Powell will explain more in a news conference shortly.

The US Fed interest rate hike is expected to encourage the central banks of other economies to follow.

The last rate hike was in 2021, which the Fed had announced to fuel economic activity in the aftermath of the crippling aftereffects of the Covid-19 pandemic.

As the US economy emerged from the Covid-19 lockdown, prices started climbing in 2021, and hit a 40-year high of 9.1 per cent in June 2022, forcing the Fed to fight back by raising interest rates banks charge each other, to reduce the volume of money in circulation and force inflation back to the target of 2 per cent. Inflation kept rising stubbornly as the Fed kept hiking the interest rate.

The Fed raised interest rates 11 times over 2022 and 2023, taking it from 0.08 per cent in 2021 to the current 5.35 per cent, which is the highest in 20 years.