US: Federal Reserve cuts interest rate by half-a-point in first reduction since Covid

In a significant move for the US economy, the Federal Reserve announced a half-a-percentage point reduction in its key lending rate on Wednesday (September 18) to 4.875 per cent. This is its first reduction in the lending rate since Covid.

This is higher than the usual quarter point cut that the US central bank carries out.

The result of the rate reduction will mean lower borrowing costs for consumers and businesses for the loans they take from banks, including the rate of interest on credit card debt.

The Federal Reserve chairman Jerome Powell in a press conference after the announcement said the half-point reduction did not represent any new pattern for the central bank but that the Fed officials wanted to keep the economy, and particularly the labour market, in good shape.

The Federal Reserve has a dual role to play – to regulate both inflation and employment.

The bank said its rate-setting committee “has gained greater confidence that inflation is moving sustainably toward 2 per cent, and judges that the risks to achieving its employment and inflation goals are roughly in balance”.

A half-point cut in the interest rate carries the risk of causing an increase in inflation.

The stock markets in the US rose after the Fed’s announcement, but all three major indexes had moved into the red by the end of the day.

Fed playing politics: Donald Trump

The Republican presidential candidate Donald Trump said the Federal Reserve’s decision to cut interest rates by half-a-point could be politically motivated.

He said either “the economy is very bad” or “the Fed is playing politics”.

“I guess it shows the economy is very bad to cut it by that much, assuming they’re not just playing politics. The economy would be very bad or they’re playing politics, one or the other. But it was a big cut,” said Trump.

Welcome news: Kamala Harris

Vice President and the Democratic presidential nominee Kamala Harris said the rate cut is “welcome news”, and added that her focus is on keeping prices down.

“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” said Harris in a statement.

“I know prices are still too high for many middle-class and working families, and my top priority as President will be to lower the costs of everyday needs like health care, housing and groceries,” she said.

Federal Reserve’s stand

“We never use our tools to support or oppose a political party, a politician, or any political outcome,” the Federal Reserve chairman Jerome Powell had told reporters in July.