Fed decision on interest rate holds major importance for world economy

The recent decision by the US Federal Reserve (Fed) to maintain its benchmark interest rate, despite a recent increase in inflation within the United States, is poised to reverberate across global monetary policy landscapes, influencing decisions made by central banks worldwide.
On May 1, the Fed maintained its rate-hold decision and said it would continue to watch incoming price data before taking a call on when to cut rates.
This could be significant given that at the start of this year, most analysts had predicted a Fed rate cut at its May 1 meeting and a total of three rate cuts in 2024.
The US Federal Reserve held interest rates steady for a sixth straight meeting yesterday, keeping the level at a 23-year high to fight stubborn price increases in the United States, the world’s largest economy.
At the end of a two-day meeting, the US central bank decided unanimously to keep the benchmark lending rate unchanged at 5.25-5.50%, citing a “lack of further progress” towards its two percent inflation target.
For months, the US central bank has held its benchmark lending rate at a high level to cool demand and rein in price increases — with a slowdown in inflation last year fuelling optimism that the first cuts were on the horizon.
But inflation has accelerated, throwing cold water on hopes of an early rate cut this year.
The central bank said it does not expect to cut rates until it has “greater confidence” that inflation is moving sustainably towards its two percent target.
The current consensus on Wall Street suggests an expectation of just a single rate cut this year, a projection with potential repercussions for monetary policy decisions by other central banks.
The monetary policies of major central banks, including the Fed, predominantly impact employment and inflation by wielding policy tools to regulate the accessibility and expense of credit within the economy.
The Fed’s principal monetary policy instrument is the federal funds rate. Adjustments to this rate ripple through to other interest rates, subsequently shaping borrowing expenses for households and businesses, alongside broader financial conditions.
Qatar, whose currency has been pegged to the dollar, reacted quickly to the Fed rate-hold decision.
On May 1, Qatar Central Bank decided to “maintain” its deposit, lending and repo interest rates following QCB’s “assessment of the current monetary requirements” of the country.
In a statement Qatar Central Bank said it will continue to assess the appropriate monetary policy, taking into account all the factors that may impact financial stability and will periodically review its monetary policy as needed to address changes in economic requirements.
When interest rates decline within an economy, borrowing becomes more affordable. Consequently, households tend to increase their purchases of goods and services, while businesses find greater motivation to borrow funds for expanding operations, acquiring equipment, or investing in new projects.
Analysts say this surge in demand for goods and services often leads to upward pressure on wages, revitalising the growth cycle.
While the connections between monetary policy, inflation, and employment aren’t immediate or direct, monetary policy certainly plays a pivotal role in mitigating excessive price increases or fuelling growth momentum.