Fed cuts rates by half a point, signals easing era has begun

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The US Federal Reserve cut its benchmark interest rate by half a percentage point on Wednesday and signaled more cuts would follow, beginning its first easing cycle since the start of the pandemic.

WASHINGTON – The U.S. central bank cut interest rates for the first time in more than four years, leaving the federal funds rate in a range of 4.75% to 5%. Michelle Bowman, a member of the Federal Open Market Committee, voted in favor of a quarter-point rate cut — the first Fed governor since 2005 to oppose a rate decision.

The large half-percentage-point cut suggests the U.S. central bank is seeking to preempt any weakening of the U.S. economy and labor market after more than a year of keeping interest rates at their highest levels since 2001.

The last time the Fed cut interest rates by more than a quarter of a percentage point was when COVID-19 hit the global economy in 2020.

“The U.S. economy is in good shape and our decision today is designed to keep it there,” Fed Chairman Jerome Powell said at a news conference on Wednesday. “Recalibrating our policy stance will help maintain the strength of the economy and labor market and will continue to enable further progress on inflation as we begin the process of moving toward a more neutral stance.”

Powell said interest rates were not on a “pre-determined” path, noting that if inflation proved to be stable, the Fed could “retreat more slowly.” He added that the central bank was “prepared to respond” if the labor market unexpectedly weakened.

“We don’t think we are backward.” [in cutting rates]“But you can take this as a signal of our commitment not to be left behind,” Powell said.

In a statement on Wednesday, the Federal Open Market Committee said it had gained “greater confidence” about inflation, even as it remained “moderately elevated.”

U.S. stocks ended Wednesday slightly lower, after rising 1.1 percent immediately after the decision was announced. European and Japanese stocks also rose on Thursday, as investors welcomed the Federal Reserve’s efforts to support economic growth now that inflation has fallen.

The Stoxx Europe 600 index rose 1% at the open, while Japan’s Topix rose 2.4%. Hong Kong’s Hang Seng advanced 1.8%.

In currency markets, the yen fell to 143.2 yen against the dollar after rising above 140 yen earlier in the week, as traders expected the Bank of Japan not to raise interest rates at its policy meeting that concludes on Friday.

In the latest “dot plot” of officials’ forecasts, most expected the rate to fall to 4.25% to 4.5% by the end of 2024, suggesting another big half-percentage-point cut at either of the two remaining meetings this year or two quarter-point cuts. Overall, that’s a much bigger cut than the quarter-percentage-point cut most officials had forecast in June, when the dot plot was last updated.

Two of the 19 officials who made the estimates believe the Fed should wait after Wednesday’s cut, while seven others expect only one quarter-point cut this year.

Policymakers also expect the federal funds rate to fall another percentage point in 2025, ending the year at a range of 3.25% to 3.5%. By the end of 2026, it is expected to fall to just below 3%.

Some analysts said the Fed’s decision pointed to underlying concerns about the economy.

“The picture is very blurry,” said Jack Manley, global market strategist at JPMorgan Asset Management. “The macro data is not as clear as we would have liked. The Fed is looking at this economy and saying, ‘We’re making more progress on inflation than we thought, but we think the labor market is starting to slip and things could get worse.’ That’s not a good sign, I think.”

Wednesday’s decision marks a milestone for the central bank after more than two years of battling inflation — and a key moment in this year’s presidential election.

Lower borrowing costs would be a boon for Democratic candidate Kamala Harris, whose campaign has been dogged by voter concerns about rising living costs even as the U.S. economy booms.

President Joe Biden welcomed the Fed’s move, saying in a post on Twitter: “We have just reached an important moment: inflation and interest rates are falling while the economy remains strong. Critics said this couldn’t happen — but our policies are cutting costs and creating jobs.”

The cut comes as Fed officials have become more confident that inflation is under control and are shifting their focus to the health of the labor market.

After peaking in 2022 at around 7%, the PCE price index was just 2.5% in July, closer to the Fed’s 2% target.

But job growth has slowed in recent months, as have other measures of demand, such as job openings, although the number of Americans filing for unemployment benefits remains historically low.

The Federal Reserve has made clear it does not want to see further weakness in the labor market amid concerns that it has waited too long to ease its grip on the economy by cutting borrowing costs.

In the forecasts released Wednesday, most officials expected the unemployment rate to peak at 4.4% over the next two years, up from its current level of 4.2% and higher than the June estimate, while economic growth stabilizes at 2% over the next several years.

Officials also expect a more moderate inflation backdrop, with personal consumption spending falling back to the target level in 2026. The median estimate for “core” inflation, which excludes volatile food and energy prices, has been revised to 2.6 percent for this year, before declining to 2.2 percent and 2 percent over the next two years.