Fed cuts interest rates by 0.50%

Fed Cuts
Fed Cuts

On Wednesday, the Federal Reserve announced cutting its benchmark interest rate by 0.50 percentage points, marking the first reduction in four years. This move is designed to ease borrowing costs as inflation-weary consumers grapple with high rates on everything from mortgages to credit cards. The cut lowers the federal funds rate from 4.75% to 5%, down from the previous range of 5.25% to 5.5%, the highest level in 23 years.

The half-point move signals that the Fed is acting aggressively to keep the U.S. economy from stalling. Historically, most rate cuts are 0.25 percentage points.

Some economists had urged the Fed to make a bolder reduction due to signs of weakness in the labor market and a cooling economy.

At a press conference to discuss the rate cut, Fed Chair Jerome Powell said the decision to ease more aggressively was based partly on the central bank’s confidence that inflation will soon reach policymakers’ goal of a 2% annual rate and cooling employment. Powell added that the labor market remains solid, though not as hot as during the pandemic when labor shortages drove up wages and made it difficult for businesses to find new workers. “We’re certainly not saying mission accomplished or anything like that, but we are encouraged by the progress we have made on bringing down inflation,” Powell said in response to a question.

He also noted that he doesn’t see any red flags signaling an economic downturn.

Still, the Fed’s economists predict that the unemployment rate could rise slightly by the end of the year, rising from its current 4.2% to 4.4%. This is the first drop in the federal funds rate since the U.S. central bank lowered rates to nearly zero in March 2020 amid an economic standstill caused by the pandemic.

Fed’s rate cut impacts economy

However, as prices surged during the health crisis, the Fed repeatedly hiked rates in an effort to curb inflation. The economic whipsaw of the past four years has left many consumers and businesses struggling with high prices and elevated borrowing costs, even as the Fed’s rate hikes have helped cool inflation close to the central bank’s 2% target.

Recently, however, there have been worrying signs about a slowdown in the labor market, prompting Fed Chair Powell to consider easing rates. In its Wednesday statement, the Fed cited its decision for a larger cut “in light of the progress on inflation and the balance of risks.

Even more important than today’s cut is what the Fed does in the months ahead as it pivots away from battling inflation to reviving the nation’s economic engines to stave off a downturn. The Fed also released its economic projections for the coming years, which shows that its members are pegging the median 2024 federal funds rate at 4.4%, representing about a one percentage point reduction from its prior level.

The Fed’s forecast shows that its members project the median federal funds rate will decline to 3.4% by the end of 2025. Experts said Wednesday’s cut should ease financial strains for some consumers. Economists also forecast that Wednesday’s rate cut will mark the first in a series of reductions this year and into 2025, with many analysts expecting additional cuts at the Fed’s November and December meetings.

Powell had previously been criticized by some economists and policy experts for moving too slowly in hiking rates to address inflation and holding off on cutting rates as the economy wobbled. But the Fed chair defended the central bank’s decision to wait until September to cut. “I think our move is timely,” Powell stated. “And as I said, you can see our 50-basis-point move as a commitment to ensure we don’t fall behind.”

The next Fed meetings are scheduled for November 6-7 and December 17-18.

Harper Johnson

Harper Johnson stands at the forefront of digital marketing, where she dissects and interprets the impact of online advertising trends, social media dynamics, and search engine algorithms on consumer behavior.

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