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US Federal Reserve Chairman Jerome Powell responded to a media question after the central bank announced the interest rate cuts.
The US central bank Federal Reserve has cut the interest rate by 0.25 on 17 September. With this, it has now come between 4.00 to 4.25%. After December 2024, Fed has reduced the rates. Fed has taken this step mainly due to softening in the labor market.
The Federal Open Market Committee voted 11–1 in favor of this deduction. The Fed Reserve said, “Recent signs suggest that the growth of economic activities has slowed down this year. Down side risk for employment has increased, due to which the policy was changed.
Interest rate was reduced three times last year
Last year, Fed had cut 0.25% in December, 0.25% in December, 0.50% in November and 0.25% in September. Since then the rates were between 4.25% to 4.50%. The September 2024 was cut after about 4 years.
Fed had reduced interest rates in September 2024 after March 2020. The Central Bank had increased interest rates 11 times between March 2022 to July 2023 to control inflation.
Labor market reduces rates if we look weak
The rates were not reduced for the past several months to control inflation. This slowed down the job growth in the US economy. Now that the labor market looks weak, the Fed Reserve felt the need for a discount to support the economy.
US President Donald Trump also recently put pressure on the Fed that the rates should be further reduced to promote economic growth. Although Fed is an independent institution and is not affected by political pressures, such statements raise the market concerns.
Rate cuts can increase investment in India
Market analysts say this cut is positive for the US stock markets, as it will make it cheaper to borrow and companies will be able to invest more.
This can also be good news for emerging markets like India, as a decrease in US rates can increase foreign investment.
Policy rate is a powerful tool to fight inflation
Any Central Bank has a powerful tool to fight inflation as a policy rate. When inflation is very high, the Central Bank tries to reduce money flow in the economy by increasing the policy rate.
If the policy rate is high, then the loan from the Central Bank to the banks will be expensive. In return, banks make loans expensive for their customers. This reduces money flow in the economy. If the money flow is low, there is a decrease in demand and inflation decreases.
Similarly, when the economy goes through a bad phase, there is a need to increase money flow for recovery. In such a situation, the Central Bank reduces the policy rate. This makes banks cheaper from central bank and customers also get loans at a cheaper rate.
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