The Fed is cutting interest rates by half a point—for the first time since 2020

The Federal Reserve cut interest rates by half a percentage point on Wednesday, kicking off what is expected to be a gradual easing of monetary policy with a larger-than-usual reduction in borrowing costs following growing uneasiness about the health of the job market. .

“The committee has high confidence that inflation is moving forward at 2%, and determines that the risks to achieving its employment and inflation objectives are about equal,” policymakers at the U.S. central bank’s rate-setting committee said in their latest statement. which caused a disagreement with Governor Michelle Bowman who favored only a partial reduction.

Policymakers see the Fed’s benchmark rate dropping by another half point by the end of this year, another full percentage point by 2025, and by the last half point in 2026 to 2.75%-3.00%.

The conclusion shows a slight improvement, from 2.8% to 2.9%, in the long-term balance of federal funds, which is considered a “neutral” situation that does not stimulate or discourage economic activity.

Although inflation “remains somewhat elevated,” the Fed’s statement said policymakers chose to cut the overnight rate to a 4.75%-5.00% range “due to progress in deflation and the balance of risks.”

The Fed will “be prepared to adjust the monetary policy stance appropriately if risks arise that could impede the achievement of the Committee’s objectives,” paying attention to “both sides of its dual mandate” to achieve stable rates and high employment.

Fed Chairman Jerome Powell will hold a press conference at 2:30 pm EDT (1830 GMT) to discuss the policy decision and the economic outlook. The Fed’s policy meeting this week was the last before voters go to the polls in what is expected to be the US presidential election on November 5.

The size of the first cut will likely raise questions about the Fed’s strategy, and whether policymakers were simply trying to respond to the drop in inflation from last year, or to address concerns among some officials that the US job market may weaken faster than expected. or necessary to ensure inflation returns fully to the Fed’s 2% target.

It’s currently about half a percentage point higher than that, and new economic projections now show the annual rate of increase in the personal cost price index falling to 2.3% by the end of this year and down to 2.1% by the end of 2025.

The unemployment rate is expected to end this year at 4.4%, higher than the current 4.2%, and will remain there until 2025. Economic growth is seen at 2.1% in 2024 and 2% next year, the same as in the last round of estimates released. in June.

The Fed has held its policy rate in the 5.25%-5.50% range since July 2023 as inflation has fallen from a 40-year high to a level now approaching the central bank’s target.

-Howard Schneider and Ann Saphir, Reuters