US interest rates cut for first time in a decade

PowellImage copyright Getty Images
Image caption Fed Chairman Jerome Powell hinted earlier this month that rates could be cut

The US central bank, the Federal Reserve, has cut interest rates for the first time since 2008.

The Fed announced a 0.25 percentage point cut, taking the federal funds target range to 2-2.25%.

Supporters say it will give a boost to a US economy showing signs of needing help.

Critics argue that a rate cut will not help and that the Fed is pandering to President Donald Trump, who had demanded a big cut.

Cutting rates makes borrowing money cheaper for businesses and consumers alike. But support for the measure was not unanimous.

The cut was opposed by two members of the Fed’s Open Markets Committee, the body responsible for setting rates. There were eight votes in favour, including Fed chair Jerome Powell and vice-chair John Williams.

The Dow Jones fell 1.4% following the announcement before recovering slightly. Analysts cited uncertainty over how many rate cuts the market should expect.

Trade tensions

At a news conference following the announcement, Mr Powell said the US economy had grown “at a healthy pace” over the first six months of the year.

However, there had been “both positive and negative developments” in the economy.

“Manufacturing output has declined for two consecutive quarters,” he said.

Image copyright EPA

Mr Powell said weak global growth had also played a part in the Fed’s decision.

He said it was not the Fed’s job to criticise US trade policy, which has been dominated by a trade battle with China as the two nations have imposed tit-for-tat tariff increases on each other’s products.

He added that trade policy tensions had “nearly boiled over” during May and June, “but now they appear to have returned to a simmer”.

Mr Powell denied that the Fed was giving in to pressure from President Trump for a rate cut, saying that there was “no place” in the central bank’s discussions for political concerns.

Low inflation

The Fed statement said the labour market remained strong and economic activity had been rising at a moderate rate.

“Job gains have been solid, on average, in recent months, and the unemployment rate has remained low,” it added.

“Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft.

“On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2%.”

Inflation is lower than US policymakers would like, which was one of the reasons for the rate cut.

At present, the US economy is creating plenty of jobs. Unemployment hit a 49-year low in May and was at 3.7% last month.

But many of those jobs are in the service sector and are low-paying with low hours, economists say.

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