Speculation goes on as US Fed cuts interest rates

On Wednesday, the US Federal Reserve has cut the interest by ½ percentage point to 4 ¾ to 5 per cent after a significantly long reign of the 5 ¼ per cent to 5 ½ per cent. The high interest rate lasted for two years.

The Fed felt that there was no other way to tame inflation, and that it was of paramount importance that inflation should be brought down to the mandatory two per cent. There was intense speculation for the past many months as to when the Fed would cut rates because it became quite evident that the high interest rate was hurting the economy in terms of stimulating the economy.

But Jerome Powell, the Fed Reserve chairman, remained unflappable by the expert buzz all around him. He knew simply that inflation would pose a greater risk to the economy than anything else. But now that the Fed has brought down the interest, the speculation continues as to how it would impact renewed economic activity.

The Fed in the press statement issued on Wednesday couched its decision of reducing the rate in the cautious language of the central bank. It said, “In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by ½ percentage to 4 ¾ to 5 per cent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”  There is the expectation that the cycle of rate cuts has begun and it will continue over the next year. The speculation is as to whether how much it would enliven the sagging American economy. The Wall Street market shares have surged after the announcement on Wednesday, but they have come down on Friday.

The inflation rate is still seen to be on the higher side, and the unemployment though high seems manageable. Fed chief Powell has declared a halt to the fight against inflation, but he has not declared that inflation is firmly under control. It has not yet happened. Similarly unemployment persists though not at alarming levels.

The rate cut would mean that the money funds that have been stacked during the high interest rate would start to dwindle because it does not make sense to pile up the cash, though it has grown in volume. The assets of money market funds have grown by $951 billion in the last two years to $2.6 trillion. The total money fund assets stood at $6.3 trillion. It was idle money in many ways, and with the rates down, it will go into real investments at home and abroad. The rate cut raised expectations in the emerging markets that the fund flows will return to these markets, and help push the growth prospects. Market observers in America say that investors will have to move their funds to riskier assets instead of staying with the low interest rate, low risk assets.

The lowering of the interest rate will have two positive after-effects. First, it will stir up investment in American businesses. Second, some of the funds will flow out of America and it will pull the global markets out of the lull as it were. It is expected that inflation will not become unruly in America as it did in the last two years, and this is a good thing for the global markets overall. It also answers the question whether the American economy is the strongest in the world though the charge is thrown at it that it is the most indebted economy in the world.