US Federal Reserve cuts interest rate by 0.25 pc, balancing curbing inflation

New York: After a confrontation with US President Donald Trump, the Federal Reserve cut its interest rate by a quarter per cent in a balancing act to prevent inflation while staving off an economic slowdown.

Announcing the cut that brings the benchmark interest rate to the 4 per cent to 4.25 per cent range on Wednesday (local time), the Fed indicated that two more cuts could be on the way this year.

Although Chairman Jerome Powell had steadfastly held the rate since the last rate cut in December because he feared a resurgence of inflation, the slowing job growth wore him down.

He had resisted so far Trump’s repeated call to cut the rate and his threats to fire him.

Powell said at a news conference, “Ordinarily, when the labour market is weak, inflation is low. But right now, we face two-sided risks of weaker growth and higher inflation. There is no risk-free path.”

“This is a challenging situation,” he said.

Even though the unemployment rate has been holding around 4.3 per cent, job growth has slowed from a monthly increase of 139,000 in May to 22,000 last month.

The inflation rate rose to 2.9 per cent in August, a 0.2 per cent increase from July.

Powell said that job growth may be slowing because of immigration restrictions.

“There’s very little growth, if any, in the supply of workers. And at the same time, demand for workers has also come down quite sharply,” he said.

Powell said that he expected a smaller effect from the tariffs on inflation than he expected a few months ago, and it could be slower and short-lived.

Trump had politicised the Federal Reserve, accusing Powell of deliberately refusing to cut the interest rate while he had obliged former President Joe Biden with three cuts last year.

Trump was away in Britain when the cut was announced.

Trump, who had appointed Powell as Fed chair during his first term, had a falling out over his reluctance to cut rates and said he was considering dismissing Powell, even though his powers were in doubt.

But he backed off while keeping up a barrage of criticism.

Trump dubbed him “Too Late Powell” and accused him of holding back economic growth during his presidency by keeping the interest rate high.

In his bid to change the Fed’s composition, Trump tried to dismiss one of the Fed governors, Biden nominee Lisa Cook, alleging irregularities in a mortgage application, which she has denied.

A federal court blocked her dismissal.

Trump appointed Stephen Miran, who had been the chair of his Council of Economic Advisers, as a governor, and he was sworn in just before the Fed meeting.

He was the only governor to dissent, saying the cut should have been 0.5 per cent.

Powell reaffirmed the Fed’s independence, which has been facing Trump’s onslaught, stating, “We don’t frame these questions at all or see them in terms of political outcomes.”

“We’re taking a longer perspective. We’re trying to serve the American people as best we can,” he said.

IANS