THE Federal Reserve on Wednesday kicked off what is expected to be a series of interest rate cuts with an unusually large half-percentage-point reduction, a move aimed at boosting a cooling job market while continuing to push down on inflation.
“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 per cent,” Fed Chair Jerome Powell said in a press conference after the US central bank cut its overnight interest rate to the 4.75 to 5.00 per cent range.
With risks to both mandates now “roughly balanced,” Powell said, the rate cut marked a “strong start” to protecting strength in the economy and the labour market, and should be seen as a commitment to not falling behind the curve.
The policy decision drew a dissent from Fed Governor Michelle Bowman, who favoured only a quarter-percentage-point cut.
Fed policymakers see the central bank’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 to 3.00 per cent range.
The endpoint reflects a slight upgrade, from 2.8 to 2.9 per cent, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.
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The Fed had kept its policy rate in the 5.25 to 5.50 per cent range since last July, when it ended an 18-month rate-hike campaign that was meant to control a surge in inflation, which soared in 2022 to a 40-year high.
Powell declined to declare victory on that score, but he did say inflation is now near the Fed‘s 2 per cent goal, and labor conditions, including an unemployment rate of 4.2 per cent, are consistent with the central bank’s other goal of maximum employment.
US stocks gained following the release of the statement and updated quarterly economic projections before reversing course to close lower on the day. The US dollar was slightly stronger against a basket of currencies, while yields on US Treasuries rose.
Rate futures traders moved to price in even more easing than projected by the Fed, with the policy rate now expected to be in the 4.00 per cent 4.25 per cent range by end of this year.
“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.
‘Welcome news’
The size of the cut announced on Wednesday 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 target.
Inflation, based on the Fed‘s preferred measure, is currently about half a percentage point above the 2 per cent level, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3 per cent by the end of this year and down to 2.1 per cent by the end of 2025.
The unemployment rate is seen ending this year at 4.4 per cent, higher than the current 4.2 per cent, and remaining there through 2025. Economic growth is seen at 2.1 per cent through 2024 and 2 per cent 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 to 5.50 per cent range since July of 2023 as inflation dropped, and its 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 Nov 5.
Despite its proximity to the election, the Fed‘s policy decision elicited a fairly muted reaction, initially at least, in political circles, although US House of Representatives Speaker Mike Johnson, a Republican, called the timing “a little suspect” even as he said it was good for consumers.
Asked what he considered suspect, Johnson told reporters, “Right on the eve of an election? I don’t know, count me as curious about it, but look it’s welcome news for consumers. We’ll take it.”
Vice-President Kamala Harris, the Democratic presidential candidate, also called the cut “welcome news” for Americans.
“I know prices are still too high for many middle-class and working families,” she said in a statement. REUTERS
