The US Federal Reserve has cut interest rates for the first time in more than four years, and signalled that more reductions will follow.
On Wednesday evening the Fed announced a cut of 50 basis points, leaving the federal funds rate at a range of 4.75 to 5%. After the announcement, policymakers at the central bank suggested rates would be cut by an additional 50 basis points before the year is out.
“The US economy is in a good place and our decision today is designed to keep it there,” Fed chair Jay Powell said at a news conference yesterday.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
The reduction by the Fed follows cuts by other central banks, including those in Europe and Canada.
Latest Videos FromMoneyWeek
The cut came amid fears that the world's largest economy is flagging, with the unemployment rate in the US climbing to 4.2% from 3.7% at the start of the year.
Isaac Stell, investment manager at Wealth Club, says: “The Federal Reserve has entered the race at pace, opting for the jumbo option, cutting headline interest rates by 0.50%.
"Despite there being no significant economic woes on the radar, policy makers have decided to get ahead of the curve as recent payroll reports have shown a gradual slowdown in the jobs market."
US stocks rallied immediately after the announcement and the FTSE 100 opened higher in London on Thursday morning as investors cheered Wednesday night’s cut.
What does the US interest rate cut mean for UK interest rates?
On Thursday the Bank of England announced its decision to keep interest rates on hold at 5% for at least the next two months. The decision is a blow for households and businesses struggling with high borrowing costs, but one that was widely expected.
The decision from the Monetary Policy Committee (MPC) was clear-cut, with members voting to hold rates by an 8-1 majority. The only committee member who voted to reduce the base rate to 4.75% was Swati Dhingra, who has repeatedly advocated for a more dovish stance from the UK central bank.
The decision to hold comes after interest rates were cut from their 16-year high of 5.25% on 1 August.
In its August policy summary, the MPC said: “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
Since then, inflation has inched up to 2.2%, and services inflation and wage growth remain elevated at 5.6% and 5.1% respectively.
The next MPC meeting will not take place until November, at which point a rate cut looks more likely. Markets have been pricing in one to two more cuts before the end of the year, with November looking like the most likely month.
And what does the US rate cut mean for markets?
Lower interest rates have the tendency to increase company share prices for a couple of reasons.
In the first instance, it allows firms to borrow cheaper debt, which it can then use to expand operations and hopefully make the business more profitable.
Secondly, in an environment of lower interest rates, putting your money into savings accounts becomes less attractive and so many investors instead move it into higher returning assets, such as stocks.
Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, says: "With the Fed making a clear statement that it's prioritising growth over inflation concerns, this could be the start of a new bull market in risk assets."
