The US Federal Reserve has taken a notable step by cutting interest rates for the first time in over four years, reducing its key lending rate by 0.5 percentage points to a range of 4.75%-5%. This move, larger than many anticipated, aims to prevent high borrowing costs from stifling the economy, even as inflation cools and concerns over the labour market grow.
Fed Chair Jerome Powell emphasised that while the labour market remains robust, the reduction is meant to ensure continued economic stability. With inflation slowing—dropping to 2.5% in August—officials are now turning their attention to potential economic risks tied to high rates, especially given the rise in unemployment to 4.2%. Although inflationary pressures have subsided, the Fed is acting pre-emptively to manage potential economic downturns.
This move comes amid broader rate cuts from other central banks, including in Europe, the UK, and Canada. The Fed’s forecasts suggest that rates may continue to drop, potentially reaching 4.4% by the end of the year and 3.4% by 2025. The larger-than-expected cut reflects caution about the broader economy, even though the Fed remains optimistic that the US economy is not facing an imminent downturn.
The Bank of England has has held interest rates at 5%, in a widely-anticipated move. The Bank’s Monetary Policy Committee, which makes the decision, voted 8 to 1 in favour of no change. Last month, the base rate was cut from 5.25% to 5%, the first reduction since the pandemic.
Andrew Bailey, the Bank of England’s governor, says cooling inflation pressure means the Bank should be able to cut interest rates gradually over the upcoming months. But, Bailey adds, “it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much”.
(Source: BBC)