Why the United States reduces interest rates

It finally happens.

After months of economic debate and growing attacks by US President Donald Trump, the American central bank reduced interest rates on Wednesday.

The federal reserve said it reduced the objective of its key loan rate of 0.25 percentage points. This will put it in a range of 4% to 4.25% – the lowest level since the end of 2022.

This decision – the decrease in the first rate of the bank since last December – is expected to launch a series of additional discounts from the coming months, which should help reduce loan costs in the United States.

But today’s decision is a warning concerning the economy, reflecting an increased consensus to the Fed that a drop -down labor market needs an increase in the lower interest rate form.

“Unemployment is still low, but we see risks downwards,” said the president of the federal reserve, Jerome Powell, at a press conference after the announcement.

This compared to the July update of the Fed which described the labor market as “solid”.

The Wednesday Cup was supported by 11 of the 12 members of the vote on the Fed Committee. Stephen Miran, who is on temporary leave from his post, the Trump’s economic advisers’ committee, voted for a larger 0.5 percentage point.

In many ways, it is not surprising that the Fed, which establishes an interest rate policy regardless of the White House, Cup.

The inflation that has torn the post-pandemic economy and prompted the bank to increase interest rates in 2022 has decreased considerably.

In the United Kingdom, in Europe, Canada and elsewhere, central banks have already responded with lower rates, while the Fed’s own decision-makers said for months that they expected to reduce borrowing costs by at least percentage half-point this year.

During the last Fed meeting, two members of the board of directors even supported a reduction.

They were exceeded because other members have remained worried that Trump’s economic policies, including tax reductions, prices and massive detention of migrant workers, do not cause inflation again.

And it is true that the United States in recent months have seen inflation stick higher. Prices increased by 2.9% over the 12 months until August, the fastest pace since January, and still above the 2% target of the Fed.

But in recent weeks, these concerns have been overshadowed by the weakness of the labor market. The United States reportedly pointed out of employment gains in August and July and a pure and simple loss in June – the first drop of this type since 2020.

“It really comes back to what we have seen on the job market – the deterioration we have seen in recent months,” said Sarah House, main economist at Wells Fargo, who expects rates to drop 0.75 percentage points by the end of the year.

“The Fed knows that when the job market runs, it turns very quickly, so they want to make sure they don’t walk on the economy’s brakes at the same time as the labor market has already slowed down.”

During the press conference following the announcement, Powell stressed that the unemployment rate remained low, at 4.3%, while recognizing an unusual disagreement among the members on what to do next.

The forecasts published by the Fed suggest that the central bank could reduce interest rates from an additional percentage point by 0.5 this year.

But seven members no longer see any need for discounts, while a member – who said that analysts were probably Miran – thinks that the rate should drop below 3%.

“This is not a bad economy – we have seen much more difficult times,” said Powell. “But from the point of view of politics, it is difficult to know what to do. There are no risk without risk at the moment.”

It is unlikely that the move on Wednesday satisfies the president, who spent months denouncing the hesitation of the Fed to reduce rates, which, according to him, should be as low as 1%.

On social networks, he called Powell “a real model”, accusing him of retaining the economy by leaving interest rates for too long.

“Too late” must reduce interest rates, now and larger than he had in mind. The accommodation will soar !!! “wrote Trump in an article on social networks before the meeting, referring to Powell.

Trump’s pressure is not only rhetorical. He moved quickly to install Miran in time for this week’s meeting after a short -term vacancy opened its doors last month.

His administration also threatened Powell to dismiss and investigated and is locked in a legal battle for his efforts to dismiss the economist Lisa Cook, another member of the board of directors.

For criticism, Trump’s movements are an assault against the independence of the Fed which is unprecedented in recent history.

Powell spent a large part of the press conference away from questions to find out if he agreed.

Asked, for example, if he considered the fight against Cook as a threat to the independence of the bank, he replied: “I see him as a judicial case, I think it would be inappropriate to comment.”

But whatever the clumsiness in the air at the meeting of this week’s Fed, analysts say they believe that the Fed’s decision to cut would have occurred regardless of Trump’s campaign.

“The president’s policies certainly provoke the economic activity which obliges the hand of the Fed,” said Art Hogan, chief strategist of the market at B. Riley Wealth.

“The president of the president of the Fed to reduce rates, I think, had no impact.”

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