US Fed Lowers Reserve Rate, Holds Interest Rates Steady

The United States Federal Reserve has held interest rates steady to avoid popping asset bubbles. Jerome Powell, Chairman of the US Federal Reserve, ignored US President, Donald Trump’s call to slash official interest rates by a full percentage point.

According to the Fed policymakers, the robust economic growth and the strong labour market in the US would help the economy revive from weaker inflation. The policymakers consider the US economy to be in good shape and expect that inflation would pick up as the US economy is expanding near its 10-year mark.

The Federal Reserve do not see any necessity to reduce the interest rates now as the country’s gross domestic product also expanded at a substantial rate in the first quarter.

The Fed reduced the interest paid on excess reserves (IOER) to 2.35% from 2.40% at its two-day meeting. The interest paid on the excess reserves is the amount of interest the Central Bank pays to banks on the excess reserves. To keep the federal funds rate within the current target band of 2.25% to 2.5%, the Fed trimmed the IOER. The federal funds rate or the overnight lending rate is the rate at which banks lend the reserve balances to other banks overnight.

The Fed claimed that the reduction in IOER is entirely made to keep the funds rate in the target zone and it does not signify any shift in the outlook of monetary policy.

Some analysts believe that the lower IOER would discourage banks from keeping their reserves at the Central Bank and would motivate them to lend in other short-term markets.

A major concern of the Fed policymakers is the muted level of inflation that continues to fall short of the Fed's 2% target. The Fed mentioned that falling energy prices could not be blamed entirely for weaker inflation. As per the recent data, the inflation of the economy is at a 1.5% annualised rate, which could possibly lower the investment and spending by households and businesses in future. This is because the weaker inflation creates doubts about the strength of the economy.

Post the announcement by the Federal Reserve of keeping the interest rates unchanged, the US stocks closed lower on Wednesday. After hitting an all-time high, the S&P 500 ended 0.75% lower, and the Dow Jones Industrial Average closed down at 0.6% or by 164 points.

In April, the gold prices fell below $1300 mark when the Vice Chairman of Federal Reserve signalled that the interest rates would remain the same as the U.S. economy is in a good place. This, in turn, exerted the pressure on gold prices as the chances of an increase in the interest rates rose.

The Australian dollar reduced sharply on Wednesday post the announcement by the Federal Reserve. At 7:00 AM in Sydney, One Australian Dollar was buying 70.15 US cents, 53.75 Pound Sterling, 78.14 Yen and 62.65 Euro cents. The Fed notification also impacted the ASX that opened lower today.

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