The US Federal Reserve’s bold move to cut interest rates by 50 basis points (bps) – or half-a-percentage – is a clear signal of its determination to get ahead of the curve and cushion the US – as also the global economy – against potential shocks, market experts said.
The first cut of this magnitude since the global financial crisis also underscores the US central bank’s willingness to use all the tools at its disposal to support the ongoing expansion and prevent a more pronounced slowdown, they said.
“It’s a bold response to the mounting economic risks – both in the US and globally,” Anuj Goel, Senior Executive Officer at Dubai-based Century Private Wealth, said.
“The Federal Reserve’s decision to implement a larger-than-expected 50 basis point rate cut is a powerful demonstration of the central bank’s resolve to proactively address the mounting risks to the US economic outlook,” he said.
Market analysts read the aggressive move by the US Fed, which caught many market participants by surprise, as a reflection of its growing concerns about the impact of slowing global growth, trade tensions, and persistently low inflation on the domestic economy.
The Fed’s bold move to cut lending rates by as much as half-a-percentage at one go comes against the backdrop of the US economy, while still expanding, has shown signs of cooling in recent months.
The moderation in retail sales growth, coupled with the stagnation in industrial production, highlighted the challenges faced by businesses and consumers alike as they navigate an increasingly uncertain economic environment.
Market experts, however, said the larger-than-expected rate cut also carried potential risks and unintended consequences.
A section of market participants sees the aggressive easing as a sign of panic, potentially fuelling volatility and uncertainty in financial markets.
Moreover, the 50 bp reduction may limit the Fed’s ability to respond to future challenges if economic conditions continue to deteriorate, they said.
Goel said as investors and analysts parse the Fed’s accompanying statement and economic projections, the central bank’s forward guidance will be crucial in shaping expectations about the future path of monetary policy.
“The possibility of additional rate cuts cannot be discounted, particularly if the global economic outlook continues to darken or if domestic growth shows further signs of weakening,” he said.
Market analysts said while the 50 bp rate cut is a significant step in the Fed’s efforts to sustain the economic expansion, it is important to recognize that monetary policy alone cannot address all the structural challenges faced by the US economy.
Policymakers must also focus on implementing fiscal measures and structural reforms that promote long-term growth, productivity, and competitiveness, they said.
US Fed Reserve’s Chairman Powell, while announcing the 50 bp rate cut, said the policy body has gained greater confidence that inflation is moving sustainably towards moving to 2 per cent target rate.
The policy body also indicated two more 25 bps rate cuts in 2024.
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