The Federal Reserve’s (Fed) first interest rate drop since March 2020 is a significant step forward. The central bank then reduced its policy rate to a range of 0-0.25% in response to the Covid-19 pandemic’s negative economic effects. This most recent move is the first cut in nearly four years and underscores the continuous shifts in U.S. monetary policy.
The FOMC meeting resulted in the declaration of a 50 basis point reduction.
Following the FOMC meeting in September, the Federal Reserve (Fed) made the decision to reduce interest rates by 50 basis points. This decision comes after a run of rate hikes that began in March 2022, just as the economy was starting to bounce back from the pandemic. The interest rate hikes culminated in a 25 basis point increase in July 2023, when rates hit a 22-year high of 5.25–5.50%.
Fed’s First Rate Reduction in 54 Months
With this action, the Federal Reserve dropped the federal funds rate by 50 basis points to 5%. This is a significant shift as it is the first cut in 54 months following a lengthy era of tightening monetary policy. The FOMC voted 11 to 1, with only one Fed Governor, Michelle W. Bowman, voting against the decrease and in favor of a lesser cut of 25 basis points.
FOMC Statement Highlights Economic Growth
In its official statement, the FOMC stated that although total unemployment is still low, it is increasing more slowly for jobs and has even somewhat increased. The Fed’s progress toward its 2% inflation objective was also highlighted in the statement, which also noted that although inflation has decreased, it is still somewhat high. The committee evaluated the threats to the employment and inflation targets and found that they were “roughly balanced.” The committee expressed confidence in the inflation’s continued march toward the target.
As a result, the federal funds rate target range was cut by 50 basis points to 4.75–5%, reflecting the Fed’s ongoing belief in the strength of the economy while ongoing concerns about inflation.
Impact on US Dollar and World Currencies
Given the Fed’s September rate reduction, it is expected that the US dollar would continue to perform worse than it has recently. Early on Monday, the dollar index—which measures how much the US dollar is worth in relation to a basket of other major currencies—dropped to 106.5, the lowest level since December 2023.
This trend may result in an increase in the value of other major currencies, particularly those that are part of the G-10. For example, it is expected that a weaker dollar will benefit the GBP, especially given the Bank of England’s (BoE) reluctance to reduce interest rates further.
The Pound Sterling According to the Fed’s Decision, there is no need to panic over inflation because Bank of England Governor Andrew Bailey has issued a warning, saying that it is still “too early to declare victory.” He expressed worries that interest rates may be cut “too quickly or too much.” Analysts predict that the BoE will only cut rates once this year, after its initial rate cut in August.
It’s possible that the UK’s slower rate cut than the Fed’s will eventually help the pound. The 1.4 level, which was last seen in June 2021, the month the Fed announced the start of its rate-hike program, may be crossed by the GBP/USD exchange rate.
The euro surpasses the dollar in ground
Parallel to this, the euro has been strengthening lately, as seen by the EUR/USD exchange rate, which recently reached a high point of about 1.2, the highest since July 2023. This new information highlights even further how the dynamics of global currency markets are shifting in tandem with the Fed’s monetary policy adjustments.
To sum up, a shift in monetary policy with global implications
With its recent move to lower interest rates, the Federal Reserve has changed the course of its monetary policy. Along with the US economy, this move has a significant impact on global financial markets, particularly in relation to currency fluctuations and central bank policy. The extent of these impacts will be closely monitored in the coming months as the Fed seeks to balance encouraging economic growth with controlling inflation.
