The US Federal Reserve has cut its key interest rate for the first time since the outbreak of the coronavirus pandemic and is moving towards further interest rate cuts this year. The Federal Reserve’s actions indicate that it wants to reduce the pressure on the economy and is confident that it has achieved lasting success in the fight against high consumer prices. The Federal Reserve’s latest economic forecasts paint an optimistic picture of the inflation rate. In the midst of the US election campaign, however, the Fed’s decision is also a matter of concern to politicians – enthusiasm among Republican presidential candidate Donald Trump seems to be limited.
Fed looks at the labor market
The significant interest rate cut of 0.5 percentage points should be a relief for companies and consumers in the USA. This is because loans will become cheaper, which means companies are more likely to invest and citizens will have to spend less on debt.
The key interest rate is now in a range of 4.75 to 5.00 percent. So far, the Fed has managed to walk the tightrope of controlling inflation with its high interest rate policy without slowing the economy too much. But recent data suggests that the labor market is beginning to weaken.
“We are trying to achieve a situation in which we can restore price stability without a painful rise in unemployment,” said Fed Chairman Jerome Powell. However, he made it clear that there is currently nothing to indicate an increased risk of recession. Nevertheless, with its latest interest rate decision, the Fed now seems to be focusing primarily on economic risks.
More interest rate cuts than previously expected
The change of course by the central bank of the world’s largest economy is quite remarkable. In June, the Fed was still expecting an average key interest rate of 5.1 percent this year. This figure was revised downwards to 4.4 percent in the new forecast. This indicates another large step of 0.5 percentage points or two small reductions of 0.25 percentage points each.
“The US central bankers are going all out with the well-prepared interest rate turnaround. The ongoing slowdown in the labor market, which is now given at least as much weight as the still high inflation, is likely to have been the deciding factor,” says Elmar Völker, analyst at Landesbank Baden-Württemberg. Fed Chairman Powell also replied to the question of whether the Fed could now declare high inflation defeated: “No, we are not. (…) We are not saying ‘mission accomplished’ or anything like that.”
Fed aims for inflation rate of 2 percent
The Fed’s forecast for the inflation rate is quite optimistic: it is expected to average 2.1 percent next year (June: 2.3 percent). The US Federal Reserve is aiming for an inflation rate of 2 percent in the medium term. The central bankers are also quite hopeful about core inflation – it does not take food and energy prices into account and, according to experts, reflects the general price trend better than the overall rate. The Fed is expecting an average of 2.2 percent here next year (June: 2.3 percent).
“The central bank will keep a close eye on inflation, which has recently fallen significantly due to energy price developments, but is by no means at the central bank’s target level in the large service sector of the US economy,” said Michael Heise, chief economist at HQ Trust.
For the Fed, the fight against high consumer prices is a balancing act. If interest rates are too high, there is a risk of a recession. If interest rates are cut too early, the inflation rate could rise again. In the summer of 2022, it was more than 9 percent.
Trump is not enthusiastic
Shortly before the presidential election on November 5, the Fed’s interest rate policy is also playing a role in the election campaign. Donald Trump, who wants to return to the White House after the presidential election in November, has accused the Fed in the past of trying to improve the mood in favor of the current administration of Democratic President Joe Biden by cutting interest rates before the election. The Republican now reacted to the interest rate decision by saying: “I think it shows that the economy is very bad when you cut (interest rates) so significantly – assuming they are not just playing politics.”
US President Biden, on the other hand, celebrated the central bank’s decision and, as expected, assessed the situation completely differently: “We have just reached an important moment: inflation and interest rates are falling while the economy remains strong.” High inflation had overshadowed Biden’s presidency – and the economic situation is the top issue for people in the country in the upcoming election. US Vice President Kamala Harris is running for the Democrats. She called the Fed’s decision “welcome news for Americans who are bearing the brunt of high prices.”
Powell: We do not serve any politician
When asked about Trump, Fed Chairman Powell stressed that countries with independent central banks like the US often have low inflation rates. Trump had repeatedly put public pressure on the Fed during his time in the White House. Powell stressed: “We serve no politician, no political figure, no cause, no issue, nothing. It’s just about maximum employment and price stability on behalf of all Americans.”
Despite new records, the New York stock exchanges did not benefit sustainably from the Fed’s significant interest rate cut on Wednesday. “Considering that the major cut was only expected by some of the players, the initial reactions on the stock exchanges were rather limited,” commented portfolio manager Thomas Altmann from asset manager QC Partners. The euro also only benefited briefly from the Fed’s interest rate decision.
© dpa-infocom, dpa:240919-930-236642/1
This is a message directly from the dpa news channel.
