US Fed Cuts Interest Rates to Boost Economic Growth

Why in the news?

  • The US Federal Reserve (Fed) cut its benchmark interest rate by 50 basis points (0.5%) to boost economic activity.
  • Lower interest rates make borrowing cheaper, encouraging growth and job creation.
  • The Fed’s decision aims to achieve a “soft landing” by reducing inflation without triggering a recession.

Why the Fed Cut Rates:

  • After aggressively raising rates to combat inflation post-COVID, the Fed maintained a5% rate for 15 months.
  • Inflation has now moderated, nearing the Fed’s 2%
  • Rising unemployment data pressured the Fed to shift focus from inflation control to boosting employment.

About US Federal Rate Changes:

  • Federal Funds Rate: Primary monetary policy tool of the US Federal Reserve.
  • Purpose: Influences employment and inflation by controlling credit availability and cost.
  • Effects: Changes affect interest rates, influencing borrowing costs for households and businesses.
  • Impact: Alters broader financial conditions, affecting consumer spending, investments, and overall economic growth.
  • Authority: Set by the Federal Open Markets Committee (FOMC).
  • Function: Guides overnight lending rates among U.S. banks, ensuring liquidity and stability in the banking system.

Federal Funds Rate:

  • Definition: Interest rate set by the FOMC for overnight lending between banks.
  • Purpose: Influences overall borrowing costs in the economy.
  • Role: Key tool to manage inflation and employment.

US Fed Rate Cut:

  • Definition: Reduction in the federal funds rate by the Federal Reserve.
  • Impact: Lowers borrowing costs for banks, leading to lower loan interest rates for consumers and businesses.

Why the Fed Cuts Rates?

  • Goals: Achieve price stability and maximum employment.
  • Stimulus: Encourages borrowing, spending, and economic growth when unemployment rises or growth slows.
  • The Fed is likely to cut rates further through 2024-2026.

Impact on India:

  • Lower US interest rates may lead global investors to borrow in the US and invest in Indian markets (stocks, debt, FDI).
  • A weakening US dollar may strengthen the Indian rupee, benefiting importers but negatively impacting exporters.
  • The Reserve Bank of India (RBI) may face pressure to adjust rates, but India’s inflation targets and economic needs differ significantly from the US.

Sources Referred:

PIB, The Hindu, Indian Express, Hindustan Times