Federal Reserve Surprises with Half-Point Rate Cut, Powell Defends Decision

The Federal Reserve surprised Wall Street with a half-point rate cut on Wednesday, bringing its target range to 4.75% to 5.00%. While the decision was not unanimous, Fed Governor Michelle Bowman called for a quarter-point cut instead. 

At his press conference, Chair Jerome Powell called the rate reduction a "recalibration" of central bank policy, noting that the Fed will continue to make decisions meeting by meeting.

Federal Reserve Chair Jerome Powell does not see the risk of an economic downturn being "elevated" following the super-sized cut. He stated, "I don't see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated." He continued, "I don't see that. You see growth at a solid rate. You see inflation coming down. You see a labor market that's still at very solid levels.

 So, I don't really see that now."

Federal Reserve Chair Jerome Powell does not expect the era of cheap money to return. "Intuitively, most — many, many people anyway — would say we are probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates," he said. "My own sense is that we are not going back to that," Powell added. 

He feels the neutral rate is likely significantly higher than it was back then, although he does not know yet how high it is.

Powell added that investors should take the Fed's 50 basis-point rate cut as a sign of its "strong commitment" toward achieving that goal.

Despite one dissenting vote on the Federal Reserve's decision to cut interest rates by 50 basis points on Wednesday, the central bank was largely on the same page about the decision, according to Federal Reserve Chair Jerome Powell. 

"There was a lot of discussion back and forth, there was also broad support for the decision that the committee voted on," Powell said. "There is a dissent, and there's a range of views, but there's actually a lot of common ground as well," he added.

The labor market is in solid condition and it is the Federal Reserve's intention to keep it that way with Wednesday's rate cut, Federal Reserve Chair Jerome Powell said. "The U.S. economy is in good shape. It is growing at a solid pace. Inflation is coming down," he said.

Federal Reserve Chair Jerome Powell said the central bank is not in a hurry to ease policy, according to its projections. 

"There's nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to get this done," Powell said in a press conference. "This process evolves over time."

 The central bank leader said the personal consumption expenditures price index got closer to the Fed's 2% goal, having been at 2.5% in July. 

The Bureau of Economic Analysis will not release the final PCE number for August until late September. "Our patient approach over the past year has paid dividends. Inflation is now much closer to our objective, and we have gained greater confidence that inflation is moving sustainably toward 2%," Powell said in his postmeeting press conference.

The basic economic concept behind the Federal Reserve's decision to cut interest rates is monetary policy. This involves adjusting the money supply in an economy to influence economic activity, primarily inflation and employment.

Federal Open Market Committee (FOMC) of the Federal Reserve: The FOMC is the policy-making body of the Federal Reserve System in the United States. It consists of 12 members, including the seven members of the Board of Governors and the presidents of five Federal Reserve Banks.

Basics:

Inflation Targeting: When inflation is high, the Fed raises interest rates. This makes borrowing more expensive, which slows down economic activity and reduces demand for goods and services, leading to lower prices.

Stimulating the Economy: When the economy is sluggish and unemployment is high, the Fed lowers interest rates. This makes borrowing cheaper, encourages investment, and stimulates spending, boosting economic growth.

In this specific case, the Fed cut interest rates to stimulate the economy and combat potential economic slowdown. By making borrowing cheaper, they hope to encourage businesses to invest, consumers to spend, and ultimately boost economic growth.

However, there's a trade-off: lowering interest rates can also lead to higher inflation. The Fed must carefully balance these two objectives.

India's Monetary Policy Management

India's monetary policy is primarily managed by the Reserve Bank of India (RBI). The RBI uses various tools to influence the money supply and interest rates in the economy.

Here are some of the key tools and strategies used by the RBI:

Repo Rate: This is the rate at which the RBI lends money to commercial banks. By lowering the repo rate, the RBI makes it cheaper for banks to borrow, which encourages them to lend more money to businesses and individuals. Conversely, raising the repo rate makes borrowing more expensive, discouraging lending.

Reverse Repo Rate: This is the rate at which the RBI borrows money from commercial banks. By raising the reverse repo rate, the RBI absorbs excess liquidity from the system, reducing the money supply and putting upward pressure on interest rates.

Open Market Operations (OMO): The RBI buys or sells government securities in the open market. By buying government securities, the RBI injects liquidity into the system, increasing the money supply and lowering interest rates. Conversely, by selling government securities, the RBI absorbs liquidity, reducing the money supply and raising interest rates.

Cash Reserve Ratio (CRR): This is the minimum percentage of deposits that commercial banks must maintain with the RBI as a reserve. By increasing the CRR, the RBI reduces the amount of money available for lending, tightening liquidity and putting upward pressure on interest rates. Conversely, by decreasing the CRR, the RBI increases the amount of money available for lending, easing liquidity and putting downward pressure on interest rates.

The RBI also uses other tools, such as moral suasion and bank rate, to influence monetary policy. The specific tools and the extent to which they are used depend on the economic conditions prevailing at a given time.

Key considerations for India's monetary policy management:

Inflation: The RBI aims to maintain inflation within a target range. If inflation is rising too rapidly, the RBI may raise interest rates to cool down demand and curb price increases.

Economic growth: The RBI also seeks to promote sustainable economic growth. If the economy is slowing down, the RBI may lower interest rates to encourage investment and spending.

Financial stability: The RBI must ensure the stability of the financial system. This involves maintaining adequate liquidity in the system and preventing excessive credit growth.

It's important to note that India's monetary policy is influenced by various factors, including global economic conditions, government policies, and geopolitical events.

Monetary Policy Committee of the Reserve Bank of India (RBI):

This committee is responsible for setting monetary policy in India. It consists of six members, including the Governor of the RBI.

Bank of England's Monetary Policy Committee (MPC): This committee is responsible for setting monetary policy in the United Kingdom.

It consists of nine members, including the Governor of the Bank of England.

The MPC is a crucial institution in modern economies, as its decisions can have a profound impact on economic stability and prosperity.

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Refrence: https://www.google.com/amp/s/www.financialexpress.com/business/investing-abroad-jerome-powells-bold-move-analysts-split-on-feds-50-bps-rate-cut-3615517/lite/