The Federal Reserve cuts interest rates by 25 basis points: details of the decision and its impact

The Federal Reserve (the US central bank) announced today (Wednesday) its decision to cut interest rates by 25 basis points, a move that global financial markets had been cautiously anticipating. With this decision, the overnight interest rate falls to a range between 3.50% and 3.75%, reflecting a gradual shift in US monetary policy aimed at balancing support for economic growth with curbing inflation.

The central bank indicated in its statement that it might postpone any further reductions in borrowing costs in the near term, citing the need to await clearer economic indicators and data, particularly regarding labor market trends and inflation rates, which the bank described as "still fairly high." This statement puts markets on tenterhooks, anticipating the "wait-and-see" approach the Fed might adopt at its upcoming meetings.

Background to the decision and the economic context

This decision comes at a time when the US economy faces complex challenges. While the Federal Reserve seeks to avert a recession by lowering borrowing costs to stimulate investment and consumption, it remains wary of a resurgence of inflationary pressures. Historically, interest rates have been the central bank's primary tool for managing monetary liquidity; raising them curbs inflation by reducing spending, while lowering them stimulates the economy.

Reaching the 3.50%-3.75% range indicates that the Fed has made significant progress in its monetary easing cycle, but the current caution stems from a careful reading of consumer price and employment indicators, as a hasty reduction could reignite inflation, something monetary policymakers are trying to avoid at all costs.

Expected impact on the region and global markets

Regionally, this decision is of paramount importance to Arab economies, particularly the Gulf Cooperation Council (GCC) countries whose currencies are pegged to the US dollar (with the exception of Kuwait, which pegs its currency to a basket of currencies predominantly in the dollar). The central banks of Saudi Arabia, the UAE, Qatar, and Bahrain typically mirror the US Federal Reserve's decisions immediately to maintain exchange rate stability. Consequently, this devaluation is expected to have a positive impact on the cost of financing in these countries, potentially stimulating the real estate, commercial, and consumer credit sectors.

Internationally, US interest rate cuts often put downward pressure on the dollar's value against other major currencies, which can support dollar-denominated commodity prices such as gold and oil. Furthermore, lower yields on US bonds may prompt investors to seek higher returns in emerging markets and equity markets, potentially leading to a rally in global stock markets in the near future, provided that upcoming economic data is not unexpectedly negative.