By Jorge Antonio Vazquez Buendia
Sep 18, 2024, 2:45 PM EDT
The Federal Reserve (FED) announced today, after its meeting with the Federal Open Market Committee (FOMC), that it will cut interest rates by half a point, keeping them in the range of 4.75% to 5.00% in September, due to the evolution of inflation in the US.
The monetary policy announcement is one of several that have been made over the past few years as part of the process of “normalizing” the US economy, seeking to address the high inflation that in its last report registered 2.5% year-on-year, and which, although it has been decreasing over the past twelve months, remains high.
US monetary policymaker Jerome Powell has acknowledged that lowering inflation will not be easy, but he said it will continue to be a priority because it affects the American economy.
Why do interest rates rise or fall?
An increase in interest rates reduces the availability of credit and increases its cost, thereby decreasing demand. Higher interest charges have a direct impact on people’s pockets, as consumption of goods, car loans and mortgages tend to increase.
Low interest rates help the economy grow, as they encourage consumption and therefore there is more demand for products. The more products are consumed, the more economic growth there is, but the negative side of keeping rates low is that consumption causes inflationary tendencies.
When the Federal Reserve’s key interest rate falls, borrowing costs for consumers also decline, influencing the cost of financing credit card purchases, auto loans and personal loans.
With the rise in interest rates, the supply of credit may be reduced since a higher interest rate implies a greater risk for the economic recovery of the portfolio and, in response, financial intermediaries react by limiting credit.
This means that interest rate increases or cuts are used in part to control inflation, which is what affects the price of products and services for Americans, although they also help to speed up or strengthen the economy.
Continue reading:
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· The FED keeps interest rates unchanged in June 2024
· The FED keeps interest rates unchanged in January 2024