Introduction to Interest Rate Cuts
The US Federal Reserve, also known as the Fed, has reduced its benchmark rate by a quarter of a percentage point. This is the first such cut since last year. The benchmark credit rate has been lowered to a range between 4.0% and 4.25%.
Reasons Behind the Rate Cut
The Fed paused its loosening cycle in January due to concerns that President Donald Trump’s import duties could influence inflation and the overall economy. However, the reduction on Wednesday was justified as "downward risks for employment have increased", despite inflation being "somewhat increased". Although inflation remains slightly above the Fed’s target rate of 2%, the data has stopped increasing in recent months, while the unemployment rate has risen.
Role of Central Banks
Central banks typically reduce interest rates to lower credit costs, increase spending, and boost the economy. By doing so, they aim to stimulate economic growth and mitigate the risks of a downturn.
Tension Between the White House and the Fed
The new governor of the Fed, Stephen Miran, formerly Trump’s business advisor, voted against the decision and favored a deeper cut of 50 basis points. Miran was sworn in at the beginning of the week, amidst criticism from Democrats that he would not separate economic decision-making from political pressure.
Voting Members and the Decision
The other eleven voting members of the Federal Open Market Committee voted for the quarterly cut. Trump has been driving the chairman of the Federal Reserve, Jerome Powell, for months, regardless of the White House. He has tried to express Powell and has openly thought about firing him.
Maintaining Independence
Powell stated on Wednesday that the Fed "had the right to wait and see how tariffs and inflation and the labor market developed" before lowering interest rates. He added that the central bank was "strongly committed" to maintaining its independence from politics.
Strengthening Separation
On Tuesday, the Democrats presented a draft law aimed at strengthening the separation between the White House and the Federal Reserve, just hours after Miran was sworn in as a Fed governor.
Future Rate Cuts
Fed officers signaled that they can reduce their interest rate twice as far this year, but only once in 2026. The decision has sparked concerns about the relationship between the White House and the Fed, with some worrying about the potential for political interference in monetary policy decisions.
