Federal interest rate cut often creates a paradox. On one hand, it is intended to shore up economy by making borrowing cheaper and encouraging businesses to take loans to invest in hiring and expanding production. On the other hand, this exercise potentially leads to inflation, dampens stock market growth, reduces investment appetite, and affects consumer behaviour. The recent Fed rate cut in September by a quarter-point, bringing down the rates to 4 to 4.25 per cent, is also triggering the same conundrum.
While the latest rate cut is aimed at boosting economy and employment, it fuels the risk of inflation from the current 2.9 per cent as of the end of August. But the fact is the government is now prioritising jobs over price stability.
"The labour market is really cooling off," said Fed Chair Jerome Powell at a news conference on Wednesday after the announcement of rate cut.
Diverging policy views
The conundrum in policy view is also reflected through two different viewpoints observed at the official level within the US Governmet. On one hand, Stephen Miran, newly appointed by Donald Trump to the Federal Reserve’s interest-rate-setting board, has made it clear that rising consumer prices following a rate cut are a lesser concern compared to slower job growth. He also argued that tariffs will ultimately boost national savings, helping to offset the impact of higher prices. On the other hand, Jerome Powell has expressed concern, highlighting slower GDP growth and fragile consumer spending.
Miran wanted a half-point cut instead of a quarter-point. He told the Economics Club of New York that rates should be below 3 per cent by the end of 2025, completely dismissing the fear that it may fuel inflation. Although this is a slightly different view from Jerome Powell, but a very similar one to the US President Donald Trump, who thinks the rates should be as low as 1 per cent. President Trump also accused Powell on social media for leaving interest rates high all these months and let the economy get brunt.
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