US Fed cuts rates by half a percentage point, cites ‘greater confidence’ about inflation
The United States Federal Reserve cut interest rates by half of a percentage point on Wednesday, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs that followed growing unease about the health of the job market.
“The committee has gained greater confidence that inflation is moving sustainably toward two per cent and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the US central bank’s rate-setting committee said in their latest statement, which drew dissent from Governor Michelle Bowman who favoured only a quarter-percentage-point cut.
Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75-3pc range.
The endpoint reflects a slight upgrade, from 2.8pc to 2.9pc, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.
US stocks gained following the release of the statement and updated quarterly economic projections, while the US dollar fell against a basket of currencies. US Treasury yields fell.
“The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 basis points and expect another 50 basis points of cuts this year. This was controversial,” said Brian Jacobsen, chief economist at Annex Wealth Management.
Even though inflation “remains somewhat elevated”, the Fed’s latest statement said policymakers chose to cut the overnight rate to the 4.75-5pc range “in light of the progress on inflation and the balance of risks”.
The central bank “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals”, with attention to “both sides of its dual mandate” for stable prices and maximum employment, it said.
The Fed’s policy meeting this week was its last before voters go to the polls in what is expected to be a close US presidential election on November 5.
Following the release of the statement and projections, investors in contracts tied to the Fed’s policy rate put about a 64pc probability on a quarter-percentage-point cut at the central bank’s next two-day policy meeting, which begins a day after the election.
Labour market slowdown
The size of the initial cut will likely raise questions about the Fed’s strategy, and whether policymakers were merely trying to account for the fast decline in inflation since last year, or address concerns among some officials that the US job market may be weakening faster than desired or needed to ensure inflation fully returns to the central bank’s 2pc target.
It is currently about half a percentage point above that level, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3pc by the end of this year and down to 2.1pc by the end of 2025. The unemployment rate is seen ending this year at 4.4pc, higher than the current 4.2pc, and remaining there through 2025. Economic growth is seen at 2.1pc through 2024 and 2pc next year, the same as in the last round of projections issued in June.
The Fed had held its policy rate in the 5.25-5.5pc range since July of 2023 as inflation fell from a 40-year high to a level now approaching the central bank’s target.