US Federal Reserve lowers key interest rate by 0.5 percentage points
Published: Wednesday, Sep 18th 2024, 20:40
Updated At: Thursday, Sep 19th 2024, 01:59
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The US Federal Reserve is responding to the slowdown in inflation by lowering its key interest rate for the first time in more than four years. On Wednesday, the Fed reduced the interest rate by 0.5 percentage points to a range of 4.75 to 5.00 percent.
Commercial banks can borrow central bank money at this rate. This is an unusually large interest rate cut. The central bank is also signaling further interest rate cuts this year.
The change of course towards a looser monetary policy had been expected. However, it was unclear whether the central bank of the world's largest economy would opt for this major interest rate jump or only lower interest rates by 0.25 percentage points.
Interest rate turnaround initiated
The Fed last cut the key interest rate in March 2020 to stimulate the economy during the onset of the coronavirus pandemic. After that, interest rates initially remained at the zero mark until the central bank began raising rates at a record-breaking pace in March 2022 and raised them to their current level a year ago.
In the USA, however, the upward pressure on prices has weakened recently. This gives the Federal Reserve more leeway to cut interest rates. The European Central Bank had already initiated a turnaround in interest rates in June. The Swiss National Bank (SNB) even did so in March.
The Fed's new economic forecast now indicates that the central bank is likely to cut interest rates even further this year. The decision-makers expect an average key interest rate of 4.4% for this year (June: 5.1%). For the coming year, the Fed expects an average key interest rate of 3.4 percent (June: 4.1 percent).
Fight against high consumer prices
The central bank has also published new forecasts for the inflation rate. This year, it expects the inflation rate to be lower than forecast in June: This is expected to average 2.3 percent (June: 2.6 percent).
For the coming year, the central bankers expect an average inflation rate of 2.1% (June: 2.3%). The US Federal Reserve is aiming for an inflation rate of 2% in the medium term.
However, core inflation, i.e. excluding food and energy prices, is expected to be 2.6 percent this year (June: 2.8 percent) and 2.2 percent next year (June: 2.3 percent). The central bankers look at this figure in particular in their analysis. It reflects the general price trend better than the overall rate, as components that are prone to fluctuation are factored out.
Balancing act for Fed
For the Fed, the fight against high consumer prices is a balancing act. If interest rates are too high, there is a risk of recession. If interest rates are lowered too early, the inflation rate could rise again. In summer 2022, it was more than 9 percent.
Lowering the interest rate makes loans cheaper so that companies can invest more easily. This could boost the economy. The interest rate cut should further weaken the dollar.
Recently, pressure from the economy on Powell to tighten interest rates has grown. One argument for this is the cooling labor market. Opponents of a loose monetary policy, on the other hand, say that interest rate cuts are not yet necessary in view of the robust US economy.
The central bank also published its economic forecast: US gross domestic product (GDP) is expected to grow by 2% in 2024 (June: 2.1%). For the coming year, the Fed is also predicting growth of 2%, the same figure as forecast in June.
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