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The Federal Reserve announced today that interest rates will be cut by half a point. This is the first rate cut since the pandemic began in March 2020. This move brings rates to 4.9%, an unusually large cut that moves rates away from the nearly two-decade highs that have been in place for the past three years. These rate cuts were widely anticipated as inflation has become more manageable over the past year.
This signals that the Fed believes its goal of keeping inflation at or below 2% is achievable in the near future. The rate cuts indicate that the focus has now shifted from protecting against inflation to protecting job growth, which has seen a decline in recent months.
According to the FOMC statement, "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."
The statement from the Fed also noted, "Job gains have slowed, and the unemployment rate has moved up but remains low." FOMC officials raised their expected unemployment rate this year to 4.4%, from the 4% projection in the last update in June, and lowered the inflation outlook to 2.3% from the previous 2.6%. On core inflation, the committee reduced its projection to 2.6%, a 0.2 percentage point reduction from June.
The most recent time the Fed cut rates by such a dramatic amount was in 2008 following the global financial crisis. The committee voted 11-1 in favor of this cut, with the only dissenting vote preferring a 2.5% rate cut. According to Bloomberg, this is the first time since 2005 that the committee has seen a dissenting vote, which came from Fed Governor Michelle Bowman.
The market reacted positively to the news, with a bump in midday trading on Wednesday. The Dow rose 303 points, or 0.7%, the S&P 500 gained 0.7%, and the Nasdaq Composite added 0.9%.
In A press confernce following the announcment Fed Chair Jerome Powell stated "The Fed remains focused on stable prices and employment for the benifit of the American people. Our Economy is strong overall and has made signifigant progress towards our goals over the past two years. That labour market has cooled from its overheated state and inflation has reduced from a peak of seven percent to two point two percent as of August. We are commited to mainitng our economies strengeth by supporting maximum employment and returning inflation to our two percent goal."
Growth in both GDP and consumer spending is expected to continue through the rest of the year, despite unemployment rising to 4.5%, which is still a relatively low level. Officials now expect to make another half-point reduction before the end of the year. Fed officials predicted they would cut interest rates to 4.4% by the end of the year — much lower than the 5.1% they had projected in June, when they last released economic estimates. By the end of 2025, they expect to lower borrowing costs by another full percentage point, to 3.4%.