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US Interest Rates Could Be Cut Again This Week

It has been widely predicted that the US economy could be boosted by another interest rate cut this week. It currently sits at 1.75pc. What are the chances of this happening and what could happen after it is ratified?

The Overall Situation

Some economists suggest that the American economy has a one in three chance of entering into a period of recession. The long-running trade war with China and dropping output levels have raised concerns that the world’s largest economy is in trouble.

With this in mind, the Federal Reserve could be set to announce the third interest rate reduction in the last four months. The financial markets seem to be convinced that this is more likely than not. In fact, they rate the chance of this happening as being at around 90%. 

Trade wars have been largely responsible for the recent decline in the levels of output from the manufacturing sector. The last month saw the steepest drop in this area for a decade. At the same time, business investment spending has been dropping at the fastest rate since 2015.

The struggling American economy is part of an overall global trend. This is part of the reason why business confidence levels are low in many countries and why international debt recovery has become an increasingly important subject. 

When Will This Be Decided?

While most analysts agree that an interest rate cut it likely this week, it has still to be discussed and agreed by the U.S. central bank. They will be getting together at a meeting that is due to last for two days. Some economists fear that a failure to drop the rates now could hurt the market and cause a drastic drop in the stock market.

A third rate cut of 0.25pc this week would mean that 0.75pc would have been taken off interest rates since the end of July. That would be the same as occurred in 1995/6 and also in 1998. President Donald Trump has spoken previously about the benefits of even lower interest rates. However, economists are divided over whether any further cuts would be beneficial or not.

What Will Happen Next?

Apart from the possible cut this week, it is also expected that the Federal Reserve gives some hints about what could happen next. Will they leave open the possibility of another cut or suggest that the rate will probably stay steady for some time?

Some of them believe that it would be best to let the interest rate cuts run their course before making any more. The fear is that too many cuts could raise inflation levels or cause bubbles to form in stocks and commodities. Others think that it would make sense to carry on cutting rates until a positive reaction is seen.

The recent breakthrough in the dispute with China, together with the reduction of the possibility of a hard Brexit, have certainly raised hopes that the American economy might avoid a full-blown recession without the need for additional interest rate cuts. However, it is sure to be a subject that is hotly debated for some time to come.