Bumper US interest rate cut aims to boost flagging economy
US interest rates have been slashed for the first time in more than four years – by more than many expected – amid fears the world’s largest economy is flagging.
The US central bank, the Federal Reserve, brought interest rates down by 0.5 percentage points to 4.75% to 5%.
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
Read more: What next for interest rates?
Bringing down inflation to 2% is a primary goal of the Fed and it has used interest rates to draw money out of the economy by making borrowing more costly since 2022, when the Ukraine/Russia price shock hit.
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Recent figures show the Fed is not far from its inflation target – with the main measure hitting 2.5% in August, the lowest rate in three years.
But signs of a weakening economy emerged last month as data on job creation led to recession fears.
The Fed signalled in its statement that while it was confident on both the inflation and growth outlooks, a slowdown in the pace of hiring was a cause for concern.
Only one member of its rate-setting committee dissented on the 0.5 percentage point reduction. Financial market participants had been split on whether it would go for the 0.25 option instead.
US stocks rallied in the wake of the decision, with the Dow Jones Industrial Average and broader S&P 500 both up by more than 0.5% from flat positions moments before the rate decision was revealed.
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Trump criticises Harris on economy
The dollar was trading a cent lower versus sterling at $1.32.
Some market analysts said the Fed’s move showed Fed chair Jay Powell and his fellow policymakers had been too slow to react to the employment slowdown.
He told reporters: “We’re going to be making decisions meeting by meeting, based on the incoming data and the evolving outlook, the balance of risks… it’s a process of recalibrating our policy stance away from where we had it a year ago, when inflation was high and unemployment low, to a place that’s more appropriate given where we are now and where we expect to be.
Federal Reserve Chairman Jerome Powell Pic: AP
“That process will time time”, he added, saying there would be no “rush”.
Michael Sheehan, fund manager of fixed income at EdenTree Investment Management, said: “Kicking off this cutting cycle with a 50 basis point reduction will undoubtedly vindicate those who had argued that the Fed had fallen behind the curve.
“Any doubts that this cutting cycle would be any less dramatic than previous ones have been firmly laid to rest.
“We expect this larger cut of 50 basis points to boost risk assets in the short term. The key for markets, and indeed the Federal Reserve, will be how far the softening of the labour market has to run.
“Powell will be hoping that taking aggressive action early will go some way to curtailing a substantial weakening and achieve the elusive soft landing.”
What about the UK?
It comes as the UK central bank the Bank of England meets on Thursday to make its own interest rate decision.
While the Bank will focus on UK economic data – and on Wednesday afternoon was expected by markets to hold rates – it could be influenced by US decision-making.
Lower interest rates tend to weaken currencies, so a big cut from the Fed could be good news for the pound.
While being able to buy more dollars is good news for people holidaying in the US and paying for imports like oil, it’s bad news for exporters who get less for their goods as a result and have a less competitive product.
Lower exports can slow inflation, meaning the Bank could be more likely to cut.
Elon Musk has said he is committed to remaining as Tesla’s chief executive for at least five years, as the electric carmaker faces pressure from consumers and the stock market over his work with Donald Trump’s government.
The world’s richest man said he will cut back on political spending after heavily backing the US president last year.
During a video appearance at the Qatar Economic Forum hosted by Bloomberg, a moderator asked: “Do you see yourself and are you committed to still being the chief executive of Tesla in five years’ time?”
Musk responded: “Yes.”
The moderator added: “No doubt about that at all?”
Musk chuckled and replied: “I can’t be still here if I’m dead.”
Tesla has borne the brunt of the outrage against Musk over his work with Mr Trump as part of his Department of Government Efficiency (DOGE), which implemented cuts across the US federal government.
Asked if the reaction made him think twice about his involvement in politics, Musk said: “I did what needed to be done.
“I’m not someone who has ever committed violence and yet massive violence was committed against my companies, massive violence was threatened against me.”
He added: “Don’t worry: We’re coming for you.”
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Musk pulls back from D.O.G.E. role
Musk spent at least 250 million dollars (£187m) supporting Mr Trump in the presidential campaign, and even held some of his own campaign rallies.
“I’m going to do a lot less in the future,” Mr Musk said. Asked why, he responded: “I think I’ve done enough.”
And he added: “Well, if I see a reason to do political spending in the future, I will do it. I do not currently see a reason.”
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It comes after a Tesla pay package Musk was due, once valued at $56bn (£41.8bn) was stopped by a judge in Delaware.
Musk referred to chancellor Kathaleen St Jude McCormick as an “activist who is cosplaying a judge in a Halloween costume”.
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But he acknowledged his Tesla pay was part of his consideration about staying with Tesla, though he also wanted “sufficient voting control” so he “cannot be ousted by activist investors”.
“It’s not a money thing, it’s a reasonable control thing over the future of the company, especially if we’re building millions, potentially billions of humanoid robots,” he added.
Donald Trump has announced the concept for his Golden Dome missile defence system – which includes plans for the US put weapons in space for the first time.
The “cutting-edge missile defence system” will include “space-based sensors and interceptors”, Mr Trump said, adding the Golden Dome “should be fully operational by the end of my term”.
The system – styled on Israel’s Iron Dome – will be able to detect and stop missiles at all points of attack, from before launch to when they are descending towards a target, the Trump administration has said.
Making the announcement in the Oval Office on Tuesday, Mr Trump told reporters the Golden Dome will be “capable of intercepting missiles even if they are launched from the other side of the world”.
The US president also said Canada “has called us and they want to be part of it”. “As usual, we help Canada as best we can,” he said.
Trump was flanked by two Golden Dome posters. Pic: AP
He has also pledged that the entire system to be built within the United States. Manufacturers in Georgia, Alaska, Florida and Indiana will all be heavily involved in the project, Mr Trump said.
General Michael Guetlein, who currently serves as the vice chief of space operations, will oversee the Golden Dome’s progress.
The space weapons “represent new and emerging requirements for missions that have never before been accomplished by military space organizations,” General Chance Saltzman, the head of the US Space Force, said at a hearing Tuesday.
Defence secretary Pete Hegseth joined the president for the announcement. Pic: AP
How much will the Golden Dome cost?
Mr Trump said he has allocated $25bn “to help get construction under way,” which he described as an initial down payment.
The total cost will be “about $175bn”, the US president added – but the Congressional Budget Office has put the price much higher.
The space-based components alone could cost as much as $542bn (£405bn) over the next 20 years, it estimated earlier this month.
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Mr Trump’s announcement came shortly after the newly confirmed US Air Force secretary said there’s currently no money allocated for the Golden Dome.
The programme is “still in the conceptual stage,” Troy Meink told senators today.
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The Pentagon has for years warned that the newest missiles developed by Russia and China are so advanced counter measures are needed.
Both Russia and China have already put offensive weapons, such as satellites capable of disabling those of other countries, in space.
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