Fed – The US Federal Reserve has cut interest rates by 25 basis points (0.25%). The new rate will be between 4.50% and 4.75%. On September 18, the Fed cut interest rates by 50 basis points (0.5%).
The September cut was made after about four years. The Fed cut interest rates in September 2024 after March 2020. To control inflation, the US Central Bank increased interest rates 11 times between March 2022 and July 2023.
Fed kept the interest rates unchanged for the third consecutive time in 2023
Last year, the Federal Reserve kept interest rates unchanged for the third consecutive time in its policy decision. On July 26, 2023, they kept the policy rate unchanged in the range of 5.25%-5.5% as per market expectations.
However, the Fed had also indicated that there would be rate cuts in 2024, which could come down to 4.6%. The Fed started raising rates in March 2022 to deal with inflation. By July last year, these rates had risen to a 23-year high.
The Fed rate determines how much interest banks will charge each other
The Fed sets rates that determine how much interest banks will charge each other on overnight loans, but it also often affects consumer debt, mortgages, credit cards and auto loans.
What could be the impact of interest rate cuts?
- Stock market analysts believe that a reduction in interest rates could lead to a boom in the stock market.
- Too much reduction can harm America’s economic health. Investors’ enthusiasm can be dampened.
- A smaller cut would disappoint the market as it was expecting a bigger cut in interest rates.
- A delay in the reduction of interest rates may slow down the pace of the job market.
Policy rate is a powerful tool to fight inflation
Any central bank has a powerful tool to fight inflation in the form of a policy rate. When inflation is very high, the central bank tries to reduce the money flow in the economy by increasing the policy rate.
If the policy rate is high, the loan that banks get from the central bank will be expensive. In return, banks make loans expensive for their customers. This reduces the money flow in the economy. When the money flow decreases, demand decreases and inflation decreases.
Similarly, when the economy goes through a bad phase, there is a need to increase the money flow for recovery. In such a situation, the central bank reduces the policy rate. This makes the loan that banks get from the central bank cheaper and customers also get loans at a cheaper rate.
