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The US Federal Reserve reduced interest rates by 0.5%, bringing relief to borrowers. This is the first rate cut in four years, indicating a potential drop to 4.4% by year-end.
The US Federal Reserve has taken a significant step by reducing interest rates for the first time in over four years. In a larger-than-expected move, the central bank lowered the target range for its key lending rate by 0.5 percentage points, setting it at 4.75% to 5%. This decision comes as inflation eases and concerns about a slowing labour market growth, offering relief to borrowers who have faced high borrowing costs in recent years.
The reduction in interest rates is seen as a response to declining inflation and the potential slowdown in the job market. Borrowers across the US, especially those with mortgages, car loans, and other debt, will benefit from this move. High borrowing costs, which were introduced to combat surging inflation in 2022, had a notable impact on consumer spending and economic growth.
The Fed's aggressive rate hike strategy in the past aimed to stabilise prices, but as inflation fell to 2.5% in August, the focus shifted towards preventing further economic risks. Unemployment rates have climbed from 3.7% at the start of the year to 4.2%, prompting the central bank to act swiftly to ensure the US economy remains stable.
The Federal Reserve has indicated that this rate cut may not be the last. Forecasts suggest that interest rates could drop further by 0.5 percentage points by the end of 2024, potentially reaching 4.4%. By 2025, the rate could drop as low as 3.4%, signalling a period of lower borrowing costs ahead.
The stock market reacted quickly to the news, with the Dow Jones, S&P 500, and Nasdaq seeing initial gains. However, these gains were short-lived as the markets closed modestly lower by the end of the day.
This recent move by the US Federal Reserve follows similar cuts by central banks in Europe, the UK, and Canada. Despite no immediate signs of a severe economic downturn, the Fed has decided to get ahead of potential risks to ensure long-term stability.
The Federal Reserve’s decision marks a pivotal shift in its economic policy, providing relief to borrowers and signalling the potential for further rate cuts soon. This move will likely influence global economic trends, particularly with central banks worldwide adjusting their strategies in response to inflation and economic uncertainties.
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