Yesterday, the US Federal Reserve unexpectedly cut the interest rate by 0.5%. Although this step was expected the day before, only a month and a half ago few people expected such a sharp reduction.
Why is this unusual?
Such large changes are rare, as the Fed typically prefers more gradual adjustments of 0.25%. A 0.5% cut signals serious economic problems. The Fed resorts to such measures to boost economic growth, soften the impact of a crisis, or prevent a recession.
Historical examples of a 0.5% decline:
In 2008, the Fed tried to prevent a financial collapse. Despite these measures, a recession occurred, and recovery took years.
In the early 2000s, a sharp decline helped stabilize stock markets after the dot-com crash, but led to overheating of the housing market, causing the 2008 crisis.
In the 1990s, rate cuts helped ease the recession, but the recovery was slow
Results
Stocks could rise in the short term as cheap credit boosts risk appetite.
A weaker dollar could support exporters.
Inflation expectations are rising, which is dangerous given the already high inflation in the US.
Such abrupt moves are often associated with crises. The fact that the Fed had to cut so much suggests that they missed the opportunity for a gradual reduction and are now forced to deal with rising unemployment and slowing GDP.
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