US Fed rate cut: Why it matters to Kenya, the world

The US Federal Reserve Bank recently cut the interest rate, a few weeks after the Central Bank of Kenya (CBK) did the same.

The old dictum that the government has no business in business is not supported by reality.

The government intervenes in business through monetary and fiscal policies. Interest cuts affect your business; lower rates mean more borrowing, spending, and growth despite the risk of inflation.

Tax rates affect our businesses by muting demand and profits. Government projects, by extension, create demand and jobs. Remember John Keynes?  

Back to the US Federal Reserve (Fed) rate cut. Why cut the rate when inflation has been stubbornly high? Some have suggested that the rate cut will leave less room for President-elect Donald Trump to make economic changes when he takes office in January. 

If he imposes tariffs the low rates will compound the inflation. That is not good for politics. Trump campaigned on the platform of reducing the cost of living. Does that sound familiar?  

The rate cuts mean employment is a bigger concern than inflation. With low rates, it is easier to buy houses or vehicles. Low rates entice us to focus on other investments instead of keeping money in the bank. 

Rate cuts have a silver lining; they will stimulate economic growth as citizens borrow more money to consume or invest. Remember CBK cutting the rates when inflation was seen as falling and growth slackening?  

One of the most daunting tasks of central banks is deciding when to cut or increase the rates and by how much. Luckily, good econometric models exist to help make that decision. That does not remove the human factor, our sentiments.  

The Fed cut is the third this year. That would mean fewer cuts next year. Does it also mean less flexibility for the incoming president? But economic circumstances could change. Could inflation lead to a rate hike next year? 

The market reacted to the cut with a fall in stock prices. The market interpreted a cut as a sign that the economy is not doing as well as expected. Did stock owners try to sell off leading to oversupply and low prices?  

Should we bother with the interest rate cut so far away? If we keep up with the US cultural trends, why not their economic trends?

Did we not appropriate parts of their constitution? Why do we call ministers secretaries? Just because Americans called them so over 200 years ago?

Don’t we love American movies and music? Don’t we love giving our children American names, from Beyoncé to Kennedy and love immigrating there?

If you have relatives in the US, I am sure they are concerned over Trump’s threat of mass deportation. If we keep up with the Kardashians, why not with the Fed? 

Low interest rates make the US less attractive to investors, particularly those who buy bonds.  

This reduces demand for dollars and weakens it. Higher rates have the opposite effect. 

The positive part is that cuts stimulate the US economy, and the rest of the world benefits through trade. Remember the African Growth and Opportunity Act (AGOA)? 

A rate cut could mean a stronger shilling. Importers and those travelling abroad or paying fees abroad will cheer up. 

Importers and tourists will not. Since Kenya is a net importer, we would love a stronger shilling.

That combined with falling oil prices and good rains could cheer the economy up. Remember cost of living has been a political hot potato.  

How can we forget that a stronger shilling helps reduce our debt, which is dominated by dollars? 

What is happening far away has implications at home. Luckily, this time positive. Do you recall the rise in US rates weakening the shilling? Any lessons for Kenya? 

One, the fact that the government can influence the rate of economic growth through policies means it can take the blame for any slack in growth.

Such policies supplement the citizen’s contribution to growth through consumption, investments and innovation.  

Two, The policy changes work best when the Federal Reserve (central bank) is independent of political influence.

Did I hear Trump has threatened to end that independence? Such independence ensures the best decisions are made objectively and for citizens, not politicians. That is why the CBK governor has security of tenure. 

Third, economic growth, with full employment and optimal inflation, is the goal of any central bank, including CBK and the Fed.

That must be complemented with good laws, an active legislature, a strong judiciary, an objective executive and a good balance among all branches of the government.  

Finally, growth is about the people, the ordinary citizens. Economic growth is driven by our hard work and incentives.

We invest and consume more if the government creates a conducive environment for us through good policies, public goods, security, a good education and health system and optimism. And confronting our soft underbelly - corruption.   

Happy Holidays my fellow countrymen!