The Federal Reserve said Wednesday it was cutting its benchmark interest rate by 0.50 percentage point, marking the first reduction in four years and aimed at easing borrowing costs as inflation-weary consumers grapple with high rates on everything from mortgages to credit cards.
The Fed said the cut lowers the federal funds rate to a range of 4.75% to 5%, from its previous range of 5.25% to 5.5%, which was its highest level in 23 years.
The half-percentage-point cut signals that the Fed is acting aggressively to keep the U.S. economy from stagnating, given that historically most rate cuts have been 0.25 percentage points. Before the move, some economists had urged the Fed to cut more aggressively, given signs of weakness in the labor market and a slowing economy.
“This is a bit of a surprise,” Fitch Ratings chief economist Brian Coulton said in an email. The half-percentage-point cut “suggests a sharp return to the goal of maintaining maximum employment and a very clear improvement in confidence in the rise in inflation over the past month and a half.”
“That last point is a little hard to understand given the upcoming inflation data, and it suggests that the Fed may be more concerned than most about the state of the labor market, where the pace of job creation still appears quite solid,” he added.
We are almost at inflation
At a news conference to discuss the rate cut, Fed Chairman Jerome Powell said the decision to ease rates more aggressively was driven in part by the central bank’s confidence that inflation will soon reach policymakers’ target of a 2% annual rate, as well as a slowdown in employment.
But Powell added that the labor market remains strong, even if not as hot as it was during the pandemic, when labor shortages pushed up wages and some businesses struggled to find new workers.
“We’re certainly not saying mission accomplished or anything like that, but we’re encouraged by the progress we’ve made” in bringing down inflation, Powell said in response to a question from CBS News’ Jo Ling Kent about whether the rate cut could be seen as a declaration of victory over sharp price increases.
Later in the press conference, Powell said he saw no warning signs of an economic slowdown. “I don’t see anything in the economy right now that suggests that the likelihood of a slowdown is high: we’re seeing solid growth, declining inflation, and a labor market that’s still at very strong levels,” he added.
However, Fed economists predict that the unemployment rate could rise slightly by year’s end, from the current 4.2% to 4.4%, according to the central bank’s summary of economic projections.
Protecting the labor market
It’s the first cut in the federal funds rate — the rate banks charge each other for short-term loans — since the U.S. central bank slashed rates to near zero in March 2020 as the pandemic shut down the economy. But as prices have soared during the health crisis, the Fed has repeatedly raised rates to try to curb inflation.
The economic boom of the past four years has left many consumers and businesses struggling with high prices and high borrowing costs, even as the Fed’s rate hikes have helped cool inflation. 2.5% in August on an annual basis, close to the central bank’s 2% target.
More recently, however, worrying signs of a slowdown in the labor market have emerged, prompting Fed Chairman Powell to say last month:the time has come” to ease rates.
In its statement Wednesday, the Fed cited its decision to taper further “in light of progress on inflation and the balance of risks.”
“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent and believes that the risks to achieving its employment and inflation goals are roughly balanced,” the Fed said in the statement. “The economic outlook is uncertain, and the Committee is mindful of the risks to both parts of its dual mandate.”
The deeper cut indicates that “the Fed is supporting the labor market,” Sonu Varghese, global macro strategist at Carson Group, said in an email.
Additional rate cuts in 2024
Even more important than today’s cut is what the Fed will do in the months ahead as it shifts its focus from fighting inflation to revving up the nation’s economic engines in an effort to stave off a slowdown.
The Fed also released its economic projections for the coming years, which show its members setting the median federal funds rate for 2024 at 4.4%, which would represent a reduction of about 1 percentage point from its previous level, financial data firm FactSet noted.
“We still have two left [Fed] “This year’s meetings are already down half a percentage point from that full percentage point – that means each of the next two meetings is a quarter of a percentage point,” Citi economist Veronica Clark told CBS News.
The Fed’s forecast shows that its members expect the median federal funds rate to decline to 3.4% by the end of 2025.
Wednesday’s decline should ease financial strain for some consumers, experts said.
“A rate cut in September, and the possibility of an additional rate cut this year, should be welcome news for investors,” Joe Gaffoglio, CEO of Mutual Of America Capital Management, said in an email before the decision. The rate cut, “combined with moderate inflation, should help ease financial pressure on low- and middle-income consumers.”
Economists also expect Wednesday’s interest rate cut to mark the first in a series of reductions this year and through 2025, with many analysts expecting the Fed to also cut its benchmark rate at its November and December meetings, according to FactSet. (The Fed does not have a rate meeting scheduled for October.)
Upcoming FOMC Meetings
Powell had previously been criticized by some economists and policy experts for acting too slowly, both by raising rates first to address inflation and by delaying rate cuts as the economy faltered.
However, he defended the central bank’s decision to wait until September to start cutting, and not before.
“I think our decision is timely,” Powell said at the news conference. “And as I said, you can see our 50 basis point target as a commitment to make sure we don’t fall behind.”
The next Fed meetings are scheduled for November 6-7, after the US presidential election, and December 17-18.
