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U.S. Federal Reserve reduced the benchmark interest rate to 4.75 percent Wednesday for the first time in four years after a prolonged battle to contain inflation. The Federal Open Market Committee (FOMC) cut the rate by half a percent from 5.25 percent, according to its press release.
A lower interest rate is expected to make available more funds for customers and businesses, galvanizing the economy in the presidential election year for the administration of President Joe Biden, whose deputy Vice President Kamala Harris is the Democratic nominee. Harris is taking on Republican former president Donald Trump.
According to the committee, recent indicators suggest that economic activity has continued to expand at a solid pace. "Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated," the press release said.
"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
"In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective," it said.
Earlier, Wall Street traders and some economists foresaw a larger-than-usual half-point cut while many analysts thought the cut would be a typical quarter-point.
According to an earlier Associated Press article, inflation is still above the 2 percent target, and Fed officials have been shifting their focus toward supporting a weakening job market and achieving a rare “soft landing,” which curbs inflation without causing a sharp recession.
High interest rates and elevated prices for everything from groceries to gas to rent have fanned public disillusionment and provided a line of attack for former Trump's campaign.
Over time, Fed rate cuts should lower borrowing costs for mortgages, auto loans and credit cards, as well as for business loans. Business spending could grow, and so could stock prices. Companies and consumers could refinance loans into lower-rate debt, according to the AP report.
Chair Jerome Powell’s observation last month in Jackson Hole, Wyoming, that Fed officials were confident that inflation was largely under control triggered speculation about imminent rate cuts. Inflation has come down from a high of 9.1% in June 2022 to 2.5% last month, while the Fed's target has been 2 percent. The Central bank raised the key interest rate 11 times in 2022 and 2023 to a two-decade high of 5.3 percent to slow borrowing and spending to cool the economy.
A series of interest rate hikes has slowed wage growth, reducing inflationary pressure. Falling oil and gas prices are also read as a sign that inflation will continue to cool further.
With talk of rate cuts in the air, many borrowing rates have fallen in anticipation. The average 30-year mortgage rate dropped to 6.2 percent last week touching the lowest level in 18 months, down from a peak of nearly 7.8 percent, according to the mortgage giant Freddie Mac.