The US Federal Reserve announced an interest rate cut of half a percentage point on Wednesday, the first downward adjustment in four years and a move that follows a slow but steady decline in America’s inflation rate.
The Federal Open Market Committee said the aggressive reduction was made “in light of the progress on inflation and the balance of risks”.
“Job gains have slowed, and the unemployment rate has moved up but remains low,” the Fed said in its announcement. “Inflation has made further progress toward the committee’s 2 per cent objective but remains somewhat elevated.”
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
The committee projected that the jobless rate would stand at 4.4 per cent by the end of the year, up from 4.2 per cent now, a range that Federal Reserve chief Jerome Powell said was “very healthy”.
“We were used to seeing numbers in the mid, and even below the mid-threes last year,” he said. “But if you look back over the sweep of the years ... that’s a very healthy unemployment rate. And anything in the low fours is a really good labour market.”
“Vacancies per unemployed is back to what is still a very strong level,” Powell added. “It’s not as high as it was. That number reached ... two vacancies for every unemployed person as measured. It’s now below around one, but that’s still a very good number.”
The Feds’ governors also pencilled in two more quarter-point cuts by the end of the year.
Coming weeks before the November 5 presidential election, the cut of 50 basis points should lead to lower borrowing costs for consumers and businesses, reducing the threat of a so-called “hard landing” for the economy.
Higher consumer prices that have prevailed through much of US President Joe Biden’s administration have been a key point on which Republicans, including the party’s nominee, Donald Trump, have hammered Democrats.
Economists and markets had been anticipating the US central bank to lower its benchmark borrowing rate by at least 25 basis points from its 5.25-5.50 per cent range. Wednesday’s decision brings the range to between 4.75 and 5 per cent.
“I believe the 50-basis point cut shows their increasing confidence in core inflation falling to 2 per cent,” said William Christiansen of Florida State University’s College of Business.
He said the decision “also suggests more concern about the softening labour market” and “an adjustment – from a year ago – to a more balanced position between growth and inflation”.
Michael Klein of Tufts University’s Fletcher School of Law and Diplomacy in Boston said: “The inflation part is moving well; there is concern about the landing remaining soft.”
Inflation in the US continued to cool last month, with consumer prices rising 2.5 per cent over the 12 months to August, as prices for fuel, autos and some other items fell. That marked the slowest pace since February 2021, and represented a decline from 2.9 per cent in July.
The Fed said in Wednesday’s announcement that it was “strongly committed to supporting maximum employment and returning inflation to its 2 per cent objective”.
It added that 11 of the committee’s 12 members voted for the cut of 50 basis points. Fed Governor Michelle Bowman voted for a quarter-point cut.
Adding to the rate cut rationale, employment increased less than expected in August, with nonfarm payrolls up by 142,000 jobs. Economists polled by Reuters had forecast an increase of 160,000 jobs.
Asked about criticism the Fed might receive over any political motivation behind the rate cut, Powell said that it was his fourth presidential election at the central bank and that “it’s always the same”.
“We’re always going into this meeting in particular and asking, what’s the right thing to do for the people we serve,” he said, adding: “It’s never about anything else.”
Christiansen agreed. “The FOMC looks carefully at the data,” he said. “This decision was based on their interpretation of the data and not political factors.”
More from South China Morning Post:
- US Fed chair says ‘the time has come’ to start cutting interest rates
- China unloads more US Treasury bills as odds of Fed rate cuts grow slim
For the latest news from the South China Morning Post download our mobile app. Copyright 2024.
