After so much waiting, it finally arrived.
For the first time in four years, the US Federal Reserve, the equivalent of the Central Bank, announced a 0.5% cut in interest rates.
With this decision, Rates remain in a range between 4.75% and 5%, a measure considered bold by analysts who had anticipated a cut but had doubts about its depth.
“Risks to achieving the employment and inflation goals are roughly balanced,” the Federal Reserve said in its announcement of the rate cut.
The rate cut is expected to provide immediate relief to consumers with credit card debt and small businesses with hard-to-pay loans.
It is also expected to encourage Americans to take out loans to buy a car or take out a mortgage. And, on the business side, it is expected to pave the way for them to start new investment projects and hire more workers, giving a boost to economic growth.
But the effects of the historic decision will reach far beyond the borders of the world’s largest economy.
Interest rates set by the Fed are a basis for lending by commercial banks.
For many years, the cost of borrowing money in that country was so low that it even reached around 0% interest.
However, at the beginning of 2022, the Fed decided to start raising rates to control inflation.
Since then, inflation in the United States has steadily declined, from a high of 9.1% (the highest in nearly four decades) to 2.5% today.
With this price stability, the entity, led by Jerome Powell, decided that it was time to relax monetary policy, that is, cut interest rates.
Effects in Latin America
For the rest of the world’s economies, the Fed’s moves are of great importance.
“What the Fed does has an impact on the whole world, especially on countries that have a close relationship with the US economy, whether through exports or remittances.”Gabriela Siller, director of Economic Analysis at Banco Base in Mexico, tells BBC Mundo.
Just look at the example of the Mexican economy: 40% of its Gross Domestic Product (GDP) is based on exports, of which nearly 80% go to the United States.
In this context, what happens in the United States directly affects Mexico and the rest of the Latin American nations that have strong commercial ties with that country.
“A rate cut creates a better outlook for the future”Siller points out.
Among other things, “the outlook for the labor market, expectations of a greater flow of remittances and expectations of positive effects on exports have improved somewhat,” he added.
Benjamin Gedan, director of the Latin America Program at the Wilson Center, explains that lower interest rates in the United States are generally welcomed in Latin America, “a region where debt has increased rapidly in recent years, diverting resources from public spending that should have gone to health, education and infrastructure.”
In recent years, he told BBC Mundo, Latin American central bank governors “were treated like celebrities” after the pandemic, for raising interest rates quickly and aggressively to control inflation.
Once the worst of the pandemic was over, many countries in the region began to lower their restrictions.
Now, with the Fed’s decision, “they will have more room to lower rates again and face new challenges,” he said.
This is important, he adds, “because this region urgently needs an economic stimulus, after a decade of stagnation.”
On the other hand, the Fed’s decision is also expected to increase commodity prices, a positive development for the main South American economies.
Capital moves
In the stock market, company valuations are expected to rise as the outlook for economic recovery improves.
Elijah Oliveros-Rosen, chief emerging markets economist at S&P Global Ratings, explains that the lowest interest rates in the United States They tend to stimulate the flow of capital towards emerging markets such as those in Latin America, in search of higher returns.
In addition, “greater economic growth in emerging markets is another factor that attracts capital inflows,” the economist told BBC Mundo.
On the contrary, the perception of greater risks to economic growth in Latin America discourages foreign investment.
Analysts expect the Fed’s historic rate cut to mark the start of a series of lower borrowing costs in the remaining months of 2024 and into next year.
Click here to read more stories from BBC News Mundo.
You can also follow us on YouTube, Instagram, TikTok, X, Facebook and in our new WhatsApp channelwhere you’ll find breaking news and our best content.
And remember that you can receive notifications in our app. Download the latest version and activate them.
- 7 Charts Comparing the Current State of the U.S. Economy to That Under the Trump Administration
- US Federal Reserve announces biggest interest rate hike in nearly 30 years