The Federal Reserve has cut interest rates for the first time in four years. Here’s why it’s important.
Over the last couple of years, many Americans have lamented the effects felt by rises in inflation; 2021 and 2022 saw a striking increase in inflation and unemployment, largely as a byproduct of the concluding Covid-19 Pandemic Era.
During this time, core inflation rose 6.9%. Initially, the Federal Reserve sought to combat rising inflation rates by raising interests rates, thus incentivizing people to save and disincentivizing people from taking out loans. Raising interest rates can combat inflation by decreasing the amount of money that exists in active circulation.
However, after over four years of cuts and stagnation, the Federal Reserve is finally lowering interest rates again.
Naturally, the recent cuts have a multitude of asterisks and implications attached.
First, the Fed lowered interests rates by a comparatively large degree, at roughly 0.5%, double the expected 0.25%. This has caught observers by surprise, although the Fed has provided a litany of reasons for the large cut, citing a pronounced decrease in inflation and fears over an economic slowdown.
Overall, the Fed is hoping to create a measured path to greater economic activity, but wishes to not risk upsetting the decreases in inflation of the last year.
Second, future cuts to interest rates, if implemented, are likely to be incremental, as to not risk reviving the inflation rates experienced in 2021 and 2022. Of course, cuts are tentative, as the Fed is cautiously prodding the idea of lowered rates and will likely monitor the resulting economic effects closely.
If the economy remains stable, the Fed may lower rates twice more this year. If the economy begins to destabilize or inflation begins to rise again, the Fed will likely refrain from cutting rates anytime in the near future.
Finally, onlookers must consider the overall implications of the cuts.
The Federal Reserve’s desire to finally decrease interest rates, after four years of resistance, signifies a degree of optimism in the economy. Although the cut comes on the heel of rising unemployment, they also come as recognition that inflation, an absolutely dominating force in the post-Covid-19 era, has finally achieved acceptable levels.
Moreover, the desire to move towards expansionary monetary policy signifies a belief that the contractionary period of the post-Covid-19 era is over, as the Fed once again prioritizes an expanding economy and a stronger labor market.
Accordingly, the Federal Reserve must now be careful, as maintaining future fiscal stability will require vigilance and a readiness to respond to potentially sudden economic trends with appropriate adjustments.
