The Federal Reserve announced on Wednesday that it is lowering the federal funds rate by half a percentage point (0.5%) or 50 basis points, its first rate cut in four years.
The previous range for the rate set by the Fed was 5.25% to 5.5%, the highest in more than two decades. Now the range is between 4.75% and 5%.
The announcement followed a meeting of the Federal Open Market Committee, one of eight scheduled meetings throughout the year. There are two more meetings scheduled for 2024, in November and December, when the Fed could cut rates.
“The Committee found high confidence that inflation is on a steady path to 2 percent, and judges that the risks to achieving its employment and inflation objectives are equal,” the FOMC press release said. “In considering further changes in the target range of the federal funds rate, the Committee will carefully evaluate incoming data, the evolving outlook, and the balance of risks.”
Federal Reserve Chairman Jerome Powell. Photo Credit: Natalie Behring/Bloomberg via Getty Images
Economists predict this move. EY’s chief economist, Gregory Daco, told Business Insider last month that the question is not whether the Fed will cut the federal funds rate in September, but by how much.
He also cited the forecast EY chief economist Lydia Boussour told the businessman – that there would be three rate cuts, each of at least 25 points or 0.25%, in September, November, and December.
Related: CPI Report: Inflation Hits 3-Year Low, Analysts Predict Fed Will Cut Rates Next Month
In a speech in August in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell again characterized the cuts as “the time has come for policy to correct” the sluggish labor market.
“The Fed has fallen behind the curve, but Fed Chairman Powell is playing catch-up,” Daco said.
How Does the Fed’s Decision Affect You?
The Fed adjusts the federal funds rate, or the lending rate banks charge each other, in response to inflation and unemployment across the country. The aim is to keep prices stable and responsive to the labor market.
Related: August Jobs Report Didn’t Meet Expectations – Here’s What It Means About Interest Rates
The federal funds rate rises to the cost of borrowing for consumers who pay for credit cards, personal loans, and cars. According to Bankrate, rate adjustments typically occur within one to two payment cycles for loans with variable interest rates.
Although the loan amount is only slightly affected by the cut, the two often fall in line together. On Wednesday, prices fell to a two-year low of 6.15%. It is expected that, given the state of the economy and Treasury yields, mortgage rates will continue to decline.
Individual banks choose how to respond to rate cuts and increases.
The level of government also affects purchasing power, labor markets, and the stock market.
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