The Federal Reserve said Wednesday it would cut its benchmark interest rate by 0.50 percentage points, marking the first cut in four years and moving to ease borrowing costs as inflation-weary consumers struggle with higher rates on everything from mortgages to credit cards.
Central Bank He said The cut lowers the federal funds rate to 4.75% to 5%, down from its previous range of 5.25% to 5.5%, the highest level in 23 years.
A half-point move signals that the Fed is working hard to keep the U.S. economy from stalling, as most rate cuts historically have been 0.25 percentage points. Before the decision, some economists urged the central bank to make a bolder cut, given signs of weakness in the labor market and a cooling economy.
“This is somewhat surprising,” Fitch Ratings chief economist Brian Coulton said in an email.
“Later incoming inflation data is a bit harder to interpret and it suggests the central bank may be more concerned about the state of the labor market, where the pace of job creation still looks firm,” he added.
There is almost inflation
In a press conference to discuss the rate cut, Fed Chairman Jerome Powell said the rate hike would be based on the Fed’s confidence that inflation will soon reach policymakers’ target of 2% annual rate, as well as cooling employment.
While not as hot as it was during the pandemic, the labor shortage has pushed up wages and some businesses are finding it difficult to find new workers, Powell said.
“We’re certainly not saying mission accomplished or anything like that, but we’re encouraged by the progress we’ve made,” Powell said in response to a question from CBS News’ Joe Ling Kent about the rate cut. It can be seen as a declaration of victory against hyperinflation.
Later in a press conference, Powell noted that he did not see any red flags indicating an economic downturn. “I don’t see anything in the economy right now that looks like there’s much potential for a downturn — you’re seeing growth at a solid rate, inflation coming down and a labor market that’s still at a solid level,” he said. was added.
However, according to a summary of the central bank’s economic projections, central bank economists forecast that the unemployment rate could rise slightly by the end of the year.
Protecting the labor market
It was the first drop in the federal funds rate — or what banks charge each other for short-term loans — since the U.S. central bank cut rates to near zero in March 2020 amid an economic standstill caused by the pandemic. But as prices spiked during the health crisis, the central bank repeatedly raised rates in an effort to control inflation.
While the central bank’s rate hikes have helped curb inflation, the economic whiplash of the past four years has left many consumers and businesses grappling with higher prices and higher borrowing costs. 2.5% in August On an annualized basis, close to the central bank’s 2% target.
Recently, however, there have been some worrying signs of a slowdown in the labor market, prompting Fed Chairman Powell last month to say “The time has come“Simplify rates.
In its Wednesday statement, the central bank cited its decision for a bigger cut “in light of the improvement in inflation and the balance of risks.”
“The panel remains highly confident that inflation is moving steadily towards 2%, and risks to achieving its employment and inflation targets are roughly balanced,” the central bank said in a statement. “The economic outlook remains uncertain, and the board remains cautious about risks on both sides of its dual mandate.”
The big cuts signal “the federal labor market has regained momentum,” Sonu Varghese, global macro strategist at the Carson Group, said in an email.
Further tariff reduction in 2024
More important than today’s cuts is what the central bank does in the coming months as it moves away from fighting inflation to improve the country’s economic engines in an effort to stave off a recession.
The Fed also released its economic projections for the coming years, which showed its members expected an average 2024 federal funds rate of 4.4%, representing a 1 percentage point reduction from its previous level, financial data firm FactSet noted.
“We only have two more [Fed] meetings this year, and they’ve already gone below half a percentage point of that full percentage point. That means a quarter of a percentage point in each of the next two meetings,” Citi economist Veronica Clark told CBS News.
The Fed’s forecast shows its members predict the federal funds rate will drop to 3.4% by the end of 2025.
Wednesday’s cut should ease financial pressures for some consumers, experts said.
“A September cut, at least one more possibility this year, should be welcome news for investors,” said Joe Cafoglio, CEO of Mutual of America Capital Management, in an email ahead of the close. The rate cut will “help curb inflation and ease the financial burden on low- and middle-income consumers.”
With many analysts expecting the Fed to cut its benchmark rate as well, economists predict Wednesday’s rate cut will be the first of cuts this year and into 2025, according to FactSet. (The Fed does not have a rate meeting scheduled for October.)
Next FOMC meetings
Powell has previously come under fire from some economists and policy experts for moving too slowly both to raise rates to address inflation and to hold off on cutting rates as the economy falters.
But the central bank chief advocated that the central bank’s decision should wait until September.
“I think our move is timely,” Powell said at the press conference. “As I said, you can see our 50 basis point move as a commitment to make sure we don’t pull back.”
The next Fed meetings are scheduled for November 6-7 and December 17-18 after the US presidential election.
