For the first time in four decades, the Federal Reserve has lowered interest rates significantly.
The key lending rate was reduced by 50 basis points to between 4.75 and 5 % on Wednesday ( Sep 18 ). While a price cut was generally anticipated, the size of it came as a surprise for some.
” Generally, 50-basis-point cuts have been used during crises so this violent walk by the Federal Reserve is indeed a surprise”, said Mr Koh Siong Qun, head of investment advice at Wrise Private Singapore.
The most recent action by one of the world’s most powerful central banks is expected to have far-reaching effects beyond America, ranging from influencing economic policies, financial markets, customer mortgages, and saving prices around the world.
Researchers explain to CNA how this will impact you in Singapore.
Why is the Fed cutting costs?
The Fed’s rate-setting commission is generally focused on two things: Prices and the employment market.
Between March 2022 and July 2023, the Fed went on a tightening binge, increasing levels from nearly zero to a five-decade large collection of 5.25 to 5.5 %, mainly due to the COVID-19 crisis.
The US central banks then remained stagnant for more than a year as it attempted to reduce inflation to its target of 2 %.
The central bank has since increased its assurance that its battle against inflation is almost over as a result of the decline in the US consumer price index, which was over 2.5 % in August, its lowest reading since 2021. Fed policymakers anticipate a lower-than-expected 2.3 % annual headline inflation price based on updated estimates released on Wednesday.
Concerns about the labor market have however decreased as inflation has subsided as unemployment rates have increased to 4.2 % from 3.7 % at the start of the year.
Fed officials now anticipate that the unemployment rate will end this year at 4.4 %, which is higher than the current 4.2 %, and will remain that low through 2025.
The price cut on Wednesday, according to Mr. Kerry Craig, a global market strategist at JP Morgan Asset Management, suggests a significant change in the Fed’s interests from regulating prices to” a jobs-first technique.”
Researchers from BMI, a system of Fitch Solutions, echoed that.
A report from BMI states that” the higher unemployment rate and lower inflation forecasts are regular with a more aggressive stop to the easing period than we had anticipated.”