SINGAPORE: The Federal Reserve has lowered interest rates for the first time in four years – and in a big way.
The United States central bank on Wednesday (Sep 18) announced a 50-basis-point reduction in its key lending rate to between 4.75 per cent and 5 per cent. While a rate cut was largely anticipated, the size of it came as a surprise for some.
“Historically, 50-basis-point cuts have been used during emergencies so this aggressive move by the Federal Reserve is indeed a surprise,” said Mr Koh Siong Qun, head of investment advisory at Wrise Private Singapore.
The latest move by one of the world’s most influential central banks is set to have far-reaching implications beyond America, from influencing monetary policies, financial markets to consumer mortgages and saving rates around the world.
Experts tell CNA how this will affect you in Singapore.
Why is the Fed cutting rates?
The Fed’s rate-setting committee is largely focused on two things: Inflation and the job market.
A surge in inflation brought about largely by the COVID-19 pandemic set the Fed on a tightening spree between March 2022 and July 2023, raising rates from near zero to a multi-decade high range of 5.25 per cent to 5.5 per cent.
The US central bank then stood pat for more than a year, as it sought to pull inflation back down to its target of 2 per cent.
The drop in the US consumer price index – down to 2.5 per cent in August, its lowest since 2021 – has boosted the central bank’s confidence that its fight against inflation is nearly over. Based on updated projections released on Wednesday, Fed policymakers are expecting a lower headline inflation rate of 2.3 per cent for this year.
But as inflation subsided, concerns around the labour market have emerged as unemployment figures rose to 4.2 per cent from 3.7 per cent at the start of the year.
Fed officials are now expecting the unemployment rate to end this year at 4.4 per cent, higher than the current 4.2 per cent, and remaining there through 2025.
Mr Kerry Craig, global market strategist at JP Morgan Asset Management, said the rate cut on Wednesday suggests a key shift in the Fed’s priorities from controlling inflation to “a jobs-first approach”
Experts from BMI, a unit of Fitch Solutions, echoed that.
“The higher unemployment rate and lower inflation forecasts are consistent with a more aggressive start to the easing cycle than we had anticipated,” a report from BMI said.
