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Interest Rate Cut: Fed

Siyoon Ahn

AARP

One of the biggest issues facing society nowadays is the interest rate cut. On September 18th, 2024, the Federal Reserve announced the cut of the interest rate for the first time in four years. The Federal Reserve lowered interest rates by 50 basis points during the Federal Open Market Committee (FOMC) meeting. The Fed decided that a slowdown in the labor market poses a greater danger than inflation; the U.S. economy added 142,000 jobs in August 2024, showing a notable decline from a year ago, when it added 210,000 jobs. The decision that the Fed made will impact the future economy. However, opinions are divided due to anxiety about future economic change. One is the Fed governor Miki Bowman who argues the interest rate should be decreased step by step, whereas the fed governor Adrian Cuber stated the interest rate should be decreased rapidly without a recession. Nick Timiraos, chief economics correspondent for The Wall Street Journal, argues that the reason for anxiety is that the hurry of the U.S. interest rate cut can cause a new shock hitting the economy and kicking inflation back up. 


Inflation has been the main problem in the economy for the last two years. The Central Bank keeps the standard inflation around 2%. However, after the pandemic, prices grew well above the 2% mark, suppressing 7.1% in 2022. The shocks to food and energy prices contributed substantially to the sharp rise in inflation. Not only that, energy price shocks were the primary cause of the high inflation rates from late 2021 to the middle of 2022. Eventually, the Fed raised the interest rate up to 5.28% to extinguish the fire. In July 2024, the Fed restored price stability, managing to bring inflation closer to 2.5%. After inflation entered the safe zone, the Fed then took their attention to the labor market. The unemployment rate in the US showed a spike after the COVID pandemic; in 2019 unemployment was about 4% but in 2020 unemployment was about 14%. Businesses said, “We don’t need workers as we did a couple of years ago.” Interest rate cuts reduce the risk of layoffs and provide greater job security. In this way, the Fed is using a trade-off, suffering from inflation while preventing unemployment. 


Interest rate cuts are key for reducing unemployment and boosting companies but also can cause a shock to markets and cause inflation again. To conclude, the wise decision of the Fed will control the future market flow.

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