U.S. Fed cuts rates for the first time in four years
The U.S. dollar remains the most important currency in the world, and the American economy is arguably the most important financial system as well. Consequently, when the U.S. Federal Reserve makes a big announcement, it creates an economic wave that ripples everywhere. That’s why Wednesday’s decision to cut the key overnight borrowing rate by 0.50% is a very big deal.
Many speculated the U.S. Fed would begin cutting rates this week, but it was generally thought it would go with a 0.25% drop to begin an interest rate-cut cycle. The 50 basis points cut lowers the federal funds rate range 4.75% to 5%.
Source: CNBC
The U.S. Fed announced in a statement: “The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”
Federal Reserve Chair Jerome Powell said, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal.”
Immediately after the news of the U.S.’s first interest rate cuts in four years, major stock market indices responded with a brief jump on Wednesday. But they ended the day nearly flat. That seemed to be a bit of a delayed reaction from investors, as the Bulls returned Thursday with Nasdaq soaring 2.5% and the Dow leaping 1.3% to pass 42,000 for the first time ever.
Notably, former U.S. President Donald J. Trump continued to criticize the monetary decisions made by the U.S. Federal Reserve. This despite centuries of financial wisdom telling us that politicians getting involved in short-term monetary policy is a bad idea. (See: Turkey – Erdogan, Tayyip.) At bitcoin bar PubKey on WednesdayTrump said, “The economy would be very bad, or they’re playing politics.”
The larger-than-expected rate cut left some commentators questioning if this action would spook the markets. But, if the U.S. Fed manages to thread the needle and cut rates without a recession, it could be a good thing. The historical precedents are very positive for shareholders.
Source: EdwardJones.ca
This large rate cut helps ease pressures on emerging markets that borrowed in U.S. dollars. And, it takes some of the pressure off other central banks around the world that didn’t want to see their currencies devalued too much relative to the mighty USD.
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