During a 2-day meeting on Tuesday and Wednesday of the Federal Open Market Commission, the Federal Reserve decided to lower interest rate by 0.25% to 2.25%.

Risk of decline

Analysts say FED’s interest rate cut signals the risk of economic slowdown instead of saying it is weakening. Macro statistics of the US economy are not bad. The unemployment rate is now in its lowest in 50 years and the Wall Street stock market is at the record high – an environment not appropriate for changing interest rates.

But FED’s interest rate is expected to change within a short time. FED has changed from increasing interest rate projection to maintaining and then reducing interest rates. The change is said to be attributed to impact of the US’s trade war with other countries and weak inflation pressures. Businesses’ production and revenue have fallen though it’s not as bad as forecasted. According to unofficial statistics, the US economy is forecast to grow 1.8% in the second quarter against the increase of 3.1% in the first quarter of this year. The US economy is forecast to grow 1.8% in each quarter until the end of 2020.

FED’s quarter-percentage-point rate cut was expected but President Donald Trump is likely to be disappointed that the Fed did not deliver the large rate cut he had demanded. On Twitter, Trump has repeatedly attacked the central bank and Fed Chairman Jerome Powell for not doing enough to help his administration's efforts to boost economic growth. He criticized Powel for not stimulating the US economy to grow 3% this year and higher in the coming years. Powell and other Fed officials in recent weeks have walked a middle ground, flagging risks such as low inflation, a weakening world economy and continued uncertainty on the global trade war between Trump and China and Europe.

Domino effect

FED’s interest rate cut is likely to be resulted in a race of interest rate cut globally. On Wednesday, the Brazil Central Bank cut interest rate 0.5% from the previous 6.5%, the rate had been kept since last March, a step expected to help the Brazilian economy to grow further. Economists expect the People’s Bank of China to ease inter-bank borrowing costs by the end of this quarter in order to help Chinese enterprises which have been facing numerous difficulties over the past time.

The Bank of Japan and the European Central Bank are predicted to reduce their interest rates. BOJ Governor Haruhiko Kuroda said BOJ is ready to expand stimulus “without hesitation,” if a global slowdown jeopardizes the country’s economic recovery. At a policy meeting in June, ECB officials expressed concern that FED’s easing measures will increase the value of euro which will force the ECB to cut interest rate as a measure to stimulate the EU economy.