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Fed cuts interest rates by half point

Interest rates

The Federal Reserve on Wednesday announced it is cutting its benchmark interest rate by 0.50 percentage points. This marks the first reduction in four years.

The move aims to ease borrowing costs as consumers struggle with high rates on mortgages and credit cards amid ongoing inflation.

The cut lowers the federal funds rate into a range of 4.75% to 5%. This is down from its previous range of 5.25% to 5.5%, which was the highest level in 23 years. The significant half-point cut signals an aggressive stance by the Fed to prevent the U.S. economy from stalling.

Historically, most rate cuts are 0.25 percentage points.

Chief economist at Fitch Ratings, Brian Coulton, noted that this cut suggests a sharp shift back to focusing on maximum employment. It also shows a strong confidence in recent progress on inflation.

Yet, he mentioned that the inflation data might not fully justify this confidence. This suggests more concern about the labor market. At a press conference, Fed Chair Jerome Powell explained the decision.

He said it was influenced by the central bank’s confidence that inflation will soon reach the target of a 2% annual rate. Powell indicated that while the labor market remains solid, it is not as strong as during the pandemic era. “We’re certainly not saying mission accomplished, but we are encouraged by the progress we have made,” Powell said.

He was responding to a question about whether this rate cut signifies victory over high price increases. Powell also mentioned that he doesn’t foresee any immediate economic downturn. He cited steady growth, decreasing inflation, and a robust labor market.

However, the Fed’s Summary of Economic Projections predicts a slight rise in the unemployment rate by the end of the year.

Fed’s aggressive interest rate cut

It is expected to go from the current 4.2% to 4.4%.

This is the first drop in the federal funds rate since March 2020. At that time, the Fed reduced rates to nearly zero due to the economic impacts of the pandemic. As prices surged during the health crisis, the Fed repeatedly hiked rates to curb inflation.

The economic volatility of the past four years has left many consumers and businesses struggling with high prices and elevated borrowing costs. Recently, signs of a slowdown in the labor market prompted the Fed to ease rates. In its Wednesday statement, the Fed highlighted its decision as “in light of the progress on inflation and the balance of risks.”

Wednesday’s rate cut is just the beginning.

Economists forecast further reductions this year and into 2025. The Fed’s recent economic projections peg the median 2024 federal funds rate at 4.4%. This is about a 1 percentage point reduction from its previous level.

“We just have two more [Fed] meetings this year, and they’ve already gone down half a percentage point. That means each of the next two meetings could see a quarter of a percentage point decrease,” explained Veronica Clark, an economist at Citi. Market reactions and expert opinions suggest that the cut, along with the potential for at least one more reduction this year, should ease financial strains on consumers.

This is particularly true for those in lower- and middle-income brackets. Despite previous criticisms for moving too slowly, Powell defended the September timing of the rate cut. “I think our move is timely,” he stated.

The next Federal Reserve meetings are scheduled for November 6-7, post the U.S. presidential election, and December 17-18. The Federal Reserve’s first rate cut since 2020 is seen as a strategic move to balance inflation control with economic growth. Further reductions are anticipated to continue easing financial pressures on consumers.

NewsReports Staff

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