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The Central Bank of America 'Fed Reserve' on Wednesday cut the interest rate by half a percentage point, giving presidential candidate Donald Trump sleepless nights, while Democrat Kamala Harris heaved a sigh of relief. In the last two and a half years, prices were constantly skyrocketing, America was going into recession (7%). Due to this, it was becoming difficult for the general public to pay high rates from grocery to home mortgages. Just a week ago, Donald Trump had expressed concern over the continuous rise in inflation in the country in a TV debate and claimed that he did not let inflation rise during his tenure. On the contrary, Democrat Kamala Harris has welcomed the cut of half a percentage point. The Chairman of the Fed Reserve has expressed confidence that now we have come out of the scope of recession. Now the Fed Reserve is trying to bring down the interest rates by two percent per annum i.e. 2.75 to 3% by the end of 2025.
There are possibilities of the Fed Reserve's decision having a positive impact on the Indian market. It will not only impact the tech industry in India, but computers and electronics imported from the US will also become cheaper. The reduction in fuel prices will provide India with immense relief in foreign exchange. After this decision of the Fed Reserve, it is possible that the RBI may give the government a chance to reduce prices by cutting its repo rate by half or a quarter percentage point. If this happens, the current governments may benefit from it in the elections. It is difficult to say what decision China will take at the Asian level, its impact is being seen in Japan, Korea and Hong Kong. At the initial level, there has been a slight reduction in the rates of sterling, euro and yuan, while on Thursday, there can be hopes of reduction in prices in the market due to the reduction in the prices of petrol, Brent crude and WTI crude oil. In Asia, the Hong Kong Monetary Authority has cut the repo rate by .50 percentage points overnight.
In view of the elections in America, the reduction in the repo rate has sparked a political debate between the Republicans and the Democrats. The Fed Reserve considers this debate meaningless. Fed Reserve Chairman Jerome Powell said in a press conference after the decision in the meeting of the Board of Directors of the Fed Reserve, “In the eyes of the board, the Fed Reserve is an autonomous body. It is neither influenced by politics nor does it allow politics to dominate. Prices were rising for the last two and a half years. Fears of recession were increasing. Continuous efforts were being made to curb this. A section of the economists was expecting on a large scale that a quarter point percent reduction in the repo rate would be better. But due to no reduction in prices, the employment sector was getting affected at the corporate level. The Fed argued that even though the financial data was not very unfavorable, the risk of job loss could not be taken under any circumstances.
He said, 'We are committed to maintaining the health and strength of our economy. For this, the Fed Reserve had also sent a framework at the political level as to what can be done at the administrative level in the coming times. For this, financial and employment data was considered. Employment was shrinking from the corporate sector, which was not tolerable at any cost. A half-point rate cut was considered necessary to maintain the strength of the employment market. In response to a question, Jerome Powell said that this is his fourth election during his tenure at the Fed Reserve and he can say with confidence that during this time the Fed Reserve was never influenced by politics or politicians. When the Fed Reserve takes any decision before or in between the elections, it takes the decision on the basis of the existing data. However, Fed Governor Michelle Bowman expressed disagreement against this decision. She was in favor of a quarter percentage point. Michelle was appointed by Donald Trump in 2018.
It is noteworthy that in the last five decades, there has hardly been any occasion when the repo rate was not reduced before elections in America. In the years 1976 and 1984, interest rates were reduced in less than ten weeks before the elections. This time bank interest rates had crossed all limits. People were finding it difficult to pay home mortgages and college students were finding it difficult to pay tuition fees due to the increased bank loan rates, the corporate world had started layoffs. These days in America, the interest rate on bank deposits is usually 4.75 to 5%, while on loans it is 6.2%, one and a half percent more than this. This bank interest rate was at the highest level in the last two decades. The employment sector was also getting affected by this.
Donald Trump's claim: Trump is claiming that inflation was under control during his tenure, the general class was happy due to low and stable prices of goods and services in the market. For this, Trump has called the decision of the Fed Reserve unfair. On the contrary, Kamala Harris has welcomed the decision of the Fed Reserve and said that this will provide relief to the common man from the increased prices. Trump has said that the President should have control over the Fed Reserve, while Kamala Harris has said that the autonomy of the Fed Reserve should be maintained. Republican Patrick McEnery, chairman of the House Finance Committee in the lower house of Congress, has said that the Fed Reserve should not worry about political noise. They should take decisions based on financial data. He also said that it should take decisions fearlessly and independently. He said that this decision of the Fed Reserve will make the general public feel that the economy is really in a bad state. What happened was that a day before the Fed decision, three Democratic Senators, including Elizabeth Warren, had appealed for a cut in the repo rate by .75 percentage points.
What the data says: In the last five elections, the repo rate was increased and in six it was reduced. Five such sitting presidents have won re-elections on the strength of the policies of the Fed Reserve. Yes, in 2000, Democratic Vice President Al Gore and Republican George Bush won the election. Then the Fed Reserve had increased the interest rate by one percentage point just before the election. Let us tell you, facing the brunt of Covid, the Fed Reserve had reduced the interest rate to almost zero in 2020, after which it raised the interest rates in 2021, but for a short time. After this, a period came that most global banks followed in view of inflation. Then the prices of essential commodities increased due to the increase in energy prices due to Russia's attack on Ukraine. This situation had come in 1970, when the Fed Reserve gradually took inadequate steps, so that demand could be curbed and prices would automatically come under control.
And finally, what happened that Jerome Powell felt that the way the employment market was fluctuating had become more disturbing than the financial data. In the months of June-July, the employment market had come down from 3.7% to 4.2%. On this, a clear disagreement was expressed on a big cut in the July meeting of the Fed Reserve. But another group of economists say that the employment situation in the market was not such that it was a danger signal. If we look at the economic data, then such a big cut was not needed considering the condition of the financial market. In such a situation, a quarter point reduction in the repo rate was enough.
