Egypt Daily News – In a significant move, the Federal Reserve has initiated a cycle of monetary policy easing by reducing interest rates by 50 basis points, the first cut since the COVID-19 pandemic in 2020 and after a lengthy period of maintaining rates at their highest level in 22 years.
This decision reflects the Fed’s attempt to counteract the aggressive tightening measures implemented over recent years and to sustain economic growth while monitoring labor market conditions.
Following the announcement, U.S. stock indices reacted positively, with the S&P 500 rising initially by 0.5% before settling at a 0.3% gain, while the Nasdaq 100, predominantly comprising technology stocks, saw a larger increase of around 1%.
Simultaneously, gold prices surged, reaching historic highs over $2,600 per ounce in the spot market and nearly $2,625 in December futures contracts. However, oil prices remained stable, with Brent crude at $73 per barrel and West Texas Intermediate at $71.17. Additionally, the Bloomberg Dollar Index saw a decrease of 0.5%.
In the cryptocurrency sphere, Bitcoin experienced a modest increase of 0.4%, climbing to $60,421, while Ethereum’s price fell by 0.7% to $2,333.
The Federal Open Market Committee, after extensive discussions, voted 11 to 1 in favor of the interest rate reduction, bringing the target range down to 5% – 4.75%.
The committee expressed increased confidence in achieving the inflation target of 2%, highlighting that the risks related to employment and inflation were nearly balanced.
The Fed noted the continued expansion of economic activity, although job gains had slowed and the unemployment rate had slightly increased yet remained low.
Christopher Rubke, chief economist at FWDBONDS, emphasized that while the markets seem content with the 50 basis points cut, there could be underlying concerns regarding the economic outlook.
He drew parallels to past rate cuts during crisis situations, suggesting that while current conditions are not alarming, investor nervousness may still persist.
Market expectations before the announcement favored the possibility of a quarter percentage point cut, but sentiment had shifted favorably towards a 50 basis point cut as bets based on swap contracts indicated a rise in likelihood from 4% to over 55% leading up to the meeting.
The Fed’s decision comes on the heels of a year-long period of staunch rate maintenance as officials awaited reassurance that inflation was on track to meet the 2% target.
Notably, core inflation in the U.S. rose unexpectedly in August, marking the highest rate in four months. In response to these conditions, Fed Chairman Jerome Powell indicated the necessity for a shift in monetary policy, reinforcing that there was no intent to exacerbate labor market slowdowns.
In summary, the Fed’s recent decision to cut interest rates signals a strategic pivot in its monetary policy stance, reflecting both the prevailing economic conditions and the central bank’s commitment to nurturing growth while managing inflation effectively.
