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US Federal Reserve cuts interest rate, citing weak global growth

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US Federal Reserve cuts interest rate, citing weak global growth
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REUTERS/Brendan McDermid
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The US Federal Reserve System cut interest rates for the first time in more than a decade on Wednesday citing muted inflation and concerns about global growth and trade uncertainty.

The last time the US central bank cut interest rates was during the 2008 financial crisis. The Federal Reserve said it would cut its key interest rate to a 2 to 2.25% range — a drop of a quarter of a percentage point.

The committee also suggested that it would continue to monitor the economic outlook and "act as appropriate to sustain the expansion".

"The outlook for the US economy remains favourable and this action is designed to support that outlook," Fed chair Jerome Powell said at a press conference. "It is intended to ensure against downside risks from weak global growth and trade policy uncertainty."

He said US job growth was strong and believes the unemployment rate would hold steady in the country but cited concerns about the global economy.

"Foreign growth has disappointed particularly in manufacturing and notably in the Euro area and China," Powell said. He said many central banks are considering "policy accommodation".

Stock markets dropped after the Fed's announcement on Wednesday and the US president tweeted that the Powell had "let us down".

"What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world..." Trump tweeted.

Could this affect Europe?

Jérémie Cohen-Setton, a research fellow at the Peterson Institute for International Economics, says the Fed's decision is significant, but not unprecedented.

Central banks cut interest rates when the economy enters into a recession, but they also sometimes cut rates when growth is slowing.

Cohen-Setton said that the decision shouldn't have much of an impact on exchange rates. Many economists expect that the European Central Bank will soon cut its interest rate as well.

"The ECB has already twisted its forward-guidance in the direction of an easier policy stance and is expected to also decrease its interest rate in September. Taken together, these changes do not thus change the relative policy stance of the US and Europe," Cohen-Setton told Euronews.

If inflation, however, were to continue to underperform or the Federal Reserve were to "relax its monetary stance" more significantly, the European Central Bank wouldn't be able to "do that given where it is right now".

"This would be a game-changer. If both regions are faced with a symmetric negative shock, the euro would be bound to appreciate against the dollar given the lack of monetary space in Europe," Cohen-Setton said.