This is the first time in over four years that the US Federal Reserve has cut interest rates.Today’s rate cut starts a cycle to reverse the restrictive conditions that had been imposed to keep inflation in check.
” In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective,” the FOMC statement read.
US Federal Reserve Rate Cut: Key Points
- The Fed delivered a half-of-a-percentage-point cut as part of the expected 100 basis-point reduction for the year.
- The US Federal Reserve’s latest economic projections, released on Wednesday following its Sept. 17-18 meeting, indicate that central bankers expect to reduce interest rates to a range of 4.25%-4.50% by the end of the year. This projection range is lower than what they had anticipated in June, as inflation moves closer to their 2% target and unemployment increases.
- The Fed’s current target range for its short-term borrowing benchmark stands at 4.75%-5.00%, and the projections suggest that policymakers anticipate quarter-point rate cuts at the remaining two meetings this year, scheduled for November and December.
- Looking further ahead, the median Fed policymaker projects a policy rate of 3.4% by the end of 2025, implying an additional four quarter-of-a-percentage-point cuts in 2024.
- The policy rate is expected to reach 2.9% by the end of both 2026 and 2027, indicating a return to what the median Fed policymaker now considers a neutral rate.
- These projections represent a shift from the Fed’s June projections, which had anticipated only one quarter-point reduction in all of 2024. The change in outlook comes as inflation has eased from unexpectedly strong readings earlier in the year, while the unemployment rate has risen to 4.2%, more than half a percentage point higher than when the Fed began its rate-hike campaign in March 2022.
- The Fed’s decision to cut rates was based on the progress made toward its inflation goal and the assessment that the risks to both its mandates are now “roughly in balance.” However, the decision was not unanimous, with Fed Governor Michelle Bowman dissenting in favor of a smaller quarter-point cut.
- It is important to note that the projections represent the views of individual policymakers rather than an agreed consensus. Two of the Fed’s 19 policymakers felt that no further rate cuts were necessary this year, while seven believed that only one additional quarter-of-a-percentage point cut would be required. On the other hand, only one policymaker anticipated more rate cuts this year than the median view.
Since July 2023, when the central bank last raised interest rates by 25 basis points to a range of 5.25% to 5.50% to address inflation, borrowing costs have remained at their highest levels in over two decades. Recently, however, attention has shifted to a moderating labor market.
The latest US economic data shows that job growth, while slowing from the high levels seen during the COVID-19 pandemic, remains in positive territory, according to a Reuters report. Retail sales and industrial production figures released on Tuesday exceeded expectations, and the Atlanta Fed’s model, which estimates economic growth based on incoming data, indicates that the economy is currently expanding at a 3.0% annual rate in the third quarter, surpassing the central bank’s estimates of the U.S. economy’s potential.
Following the pandemic, a perfect storm of factors, including goods scarcity, significant spending, labor shortages, large government deficits, and aggressive corporate pricing, pushed inflation to its highest level in 40 years in 2022.
Although wage growth was robust and outpaced price increases for many workers, sentiment remained negative for much of the time. The Federal Reserve raised interest rates to slow the economy, which led to higher home mortgage rates and banks tightening credit for various loans and borrowers.
The Fed’s preferred inflation measure is now just half a percentage point above the central bank’s target, and it is expected to gradually decrease throughout the remainder of 2024 and into the following year.
Despite the challenges, the economy has performed better than anticipated by nearly all measures.
This year, US stock markets have rallied, with all three major indexes reaching record highs due to expectations of lower interest rates as inflation eased and the job market displayed gradual signs of cooling.
