The Federal Reserve announced a significant move on Wednesday, cutting its benchmark interest rate by half a percentage point. This marks the first time the US central bank has reduced rates since the onset of the pandemic. By initiating its first easing cycle in over four years, the Fed is signalling that further rate cuts are likely in the near future as part of a broader effort to support the economy.
With this reduction, the federal funds rate now sits between 4.75% and 5%, a notable drop from the previous levels. Michelle Bowman, a member of the Federal Open Market Committee, voted in favour of a smaller, quarter-point cut. This dissent makes Bowman the first Fed governor since 2005 to disagree with the central bank’s decision on the scale of a rate change, highlighting some differences in how committee members view the future direction of the economy.
The larger-than-expected half-point cut suggests that the Federal Reserve is attempting to take pre-emptive action, anticipating potential signs of weakness in the US economy or labour market. The central bank has kept interest rates at their highest levels since 2001 for over a year, as part of its efforts to curb inflation and maintain economic stability. However, with concerns growing about a possible slowdown, the Fed is shifting its stance to provide more stimulus and encourage borrowing and investment.
This rate cut reflects the central bank’s desire to avoid a downturn in economic activity, while also addressing fears of rising unemployment. The move is seen as an attempt to balance the delicate trade-off between sustaining economic growth and managing inflation, which remains a priority for policymakers. As the Fed continues to monitor economic conditions, more rate reductions may be on the horizon to keep the recovery on track.
The last time the Federal Reserve cut interest rates by more than a quarter point was during the economic upheaval caused by the Covid-19 pandemic in 2020. On Wednesday, the Fed made a similar move, aiming to support the current state of the US economy.
Fed Chair Jay Powell emphasised that the US economy is in a stable position, and the recent decision is intended to keep it that way. He explained that this adjustment in policy will help maintain the strength of both the economy and the labour market, while also making progress towards controlling inflation. The goal is to move towards a more neutral stance without disrupting ongoing economic growth.
Powell clarified that the Fed’s actions are not following a “preset” path. If inflation remains persistently high, the central bank may slow down its easing efforts. At the same time, he noted that the Fed is ready to respond if any unexpected weaknesses arise in the labour market. The central bank’s approach is flexible, allowing for adjustments based on economic conditions as they evolve.
“We do not believe we are behind in cutting rates,” said Fed Chair Jay Powell. “But this move signals our commitment to staying ahead of potential issues.” His remarks came after the Federal Open Market Committee (FOMC) made its latest decision to lower interest rates.
In a statement, the FOMC expressed increased confidence in controlling inflation, though they noted it remained somewhat high. This decision marks the Fed’s continued effort to manage inflation while supporting economic growth.
Following the announcement, US stocks initially saw a brief rally before ending slightly lower by the close of Wednesday. Meanwhile, European and Japanese markets responded positively on Thursday, with investors welcoming the Fed’s efforts to maintain economic momentum as inflation pressures eased. Europe’s Stoxx 600 rose 1%, and Japan’s Topix gained 2.4%, while Hong Kong’s Hang Seng advanced by 1.8%.
In currency markets, the yen weakened to ¥143.2 against the dollar after briefly strengthening to ¥140 earlier in the week. Traders expected the Bank of Japan would hold off on raising interest rates at their policy meeting set for Friday.
In the latest “dot plot” of forecasts from officials, most anticipate the US policy rate to drop to between 4.25% and 4.5% by the end of 2024. This points to the possibility of another half-point cut at one of the two remaining meetings this year or two smaller quarter-point reductions. This outlook represents a bigger cut than the quarter-point reduction previously projected in June when the last dot plot was updated.
Of the 19 Fed officials, two suggested the central bank should pause further rate cuts following Wednesday’s reduction, while seven others predicted only one additional quarter-point cut by year-end.
Policymakers also anticipated that the federal funds rate would drop another full percentage point in 2025, settling between 3.25% and 3.5%. By the end of 2026, the rate is expected to dip just below 3%.
Analysts have noted that the Fed’s actions signal deeper concerns about the overall health of the US economy, despite the efforts to maintain stability.
Jack Manley, global market strategist at JPMorgan Asset Management, described the current economic situation as unclear. He noted that while the Fed sees progress in reducing inflation, there are concerns about the weakening labour market, which could signal trouble ahead.
The Fed’s decision to cut rates marks a significant development after over two years of tackling inflation and could impact the presidential election this year. Lower borrowing costs might benefit Democratic candidate Kamala Harris, who has faced voter concerns about high living expenses despite a strong economy.
President Joe Biden praised the Fed’s decision, highlighting in a post on X that inflation and interest rates are decreasing while the economy remains robust. He argued that the administration’s policies are effectively reducing costs and creating jobs.
The rate cut reflects the Fed’s growing confidence in controlling inflation while shifting focus to the labour market’s health. After peaking at around 7% in 2022, the personal consumption expenditures price index dropped to 2.5% in July, approaching the Fed’s 2% target.
Recent data shows that job growth has slowed in recent months, and other indicators of demand, like job vacancies, have also decreased. Despite this, the number of Americans claiming unemployment benefits remains low compared to historical norms.
The Federal Reserve is concerned about further weakening in the labour market and has been cautious about lowering borrowing costs too late. In their latest projections, most officials expect the unemployment rate to rise to 4.4% over the next two years, up from the current 4.2% and higher than previous estimates from June. Economic growth is anticipated to stabilise at around 2% annually for the foreseeable future.
Inflation is projected to ease, with the Personal Consumption Expenditures (PCE) index expected to return to the target level by 2026. The median forecast for “core” inflation, which excludes volatile food and energy prices, has been revised down to 2.6% for this year, and is expected to decrease further to 2.2% and 2% over the next two years.
Download NOW
4 Simple Steps To Becoming Wealthy Through Property