The US central bank has cut interest rates for the first time since March 2020, marking a major shift for the world’s largest economy.
The U.S. Federal Reserve has decided to drop interest rates to 4.9%, down from around 5.3%.
Federal Reserve Chair Jerome Powell cited weak jobs growth and declining inflation (rising prices).
Australia’s interest rates are currently at 4.35%, with no signs the Reserve Bank will bring them down anytime soon.
Interest rates
Central banks around the world set interest rates for their respective countries.
Cash rates dictate how much it costs to borrow money.
For example, Australia’s 4.35% cash rate means the cost of borrowing $100 from the Reserve Bank of Australia (RBA) would be $104.35.
Raising interest rates is a tool central banks use to limit the pace of inflation, by making it more expensive to borrow money, limiting overall spending.
US economy
Like other major economies, the U.S. central bank dropped interest rates to 0.25% when COVID-19 first hit.
Once the COVID lockdowns ended, inflation started rising in the U.S. The central bank, the Federal Reserve, started lifting the official cash rate in March 2022.
Annual inflation peaked at 9.1% in June 2022 and has been steadily declining ever since.
Federal Reserve
Today, the Federal Reserve cut the official cash rate from 5.3% to 4.9%.
The decision surprised some analysts, who had expected a smaller cut.
Powell said the decision was based on “confidence that inflation is coming down,” and said “the U.S. economy is in good shape”.
Australia
Australia’s rates have remained at 4.35% since November last year.
Annual inflation has been falling from a high of 7.8% in 2022, although it increased slightly to 3.8% in the three months to June.
RBA Governor Michele Bullock has said a cut before the end of the year would be “premature”.
