The US Federal Reserve and President Donald Trump have been at loggerheads for a long time over the need to keep the interest rates stable or revise them downwards for the overall interest of the economy. The Fed seems to have finally yielded on the issue when it reduced the discount rate on 31st July, 2019 for the first time since 2008, citing concerns about the global economy and muted US inflation. The US central bank’s benchmark overnight lending rate was not only lowered to a target range of 2 percent to 2.25 percent but the Fed also signalled a readiness to cut borrowing costs further, if needed. In a statement at the end of latest two-day policy meeting, the Fed said that it had decided to cut rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures” and promised that it will continue to monitor the incoming information and “act as appropriate to sustain” a record-long US economic expansion.

The cut in the US discount rate, coming after about 11 years, was of course a huge development both for the US economy and the rest of the world. Most of the pundits had become used to the policy of maintaining the discount rate unchanged by the Fed which was often criticised and censured by the top US government officials including the President. It is no secret that the Fed, like any other central bank, preferred monetary stability over other considerations while President Trump wanted easing of monetary policy to accelerate the growth rate of the US economy and minimize unemployment for political expediency, especially in view of the next presidential election which is not far off. It was to be noted that since the President and his government could not directly interfere in the monetary policy formulation due to the autonomous status of the Federal Reserve, it could only be goaded but not instructed to follow a certain path of action. Anyhow, the cut in the discount rate has evoked various kinds of responses from analysts. For instance, Brett Ewing, Chief Market Strategist at First Franklin Financial Services, welcomed the move by saying that it was smart of the Fed to go ahead and “it is better than none at all” while Boston Fed President and Kansas City Fed President argued for leaving the rates unchanged. Obviously, there could be doubts about a rate cut in the face of current expansion, an unemployment rate that is near a 50-year low and increasing household spending. The rationale of a rate cut could easily be questioned when the existing economic conditions and trends are almost similar to the ones likely to be achieved through a rate cut. Defending the new stance, the Fed, however, said that the rate cut should help return inflation to its 2 percent target and sustained economic activity and a strong labour market would also be the most likely outcomes. The President, nonetheless, is not likely to be very happy with the latest move of the Fed. He had repeatedly harangued the Fed, particularly its Chairman Jerome Powell, for not doing enough to help his administration to boost economic growth and would be disappointed with a smaller rate cut.

It may be stressed that the change in the US discount rate is also very important for other countries of the world because the US is the biggest economy of the world; it influences the level of trade and economic growth in other countries. It is often said that when the US sneezes world catches cold. Our policymakers need to have a close watch even on minor developments in the US because Pakistan has a very close trade relationship with it and any economic expansion in that country could help enhance the level of our exports and home remittances.