The Federal Reserve cut its benchmark interest rate by half a percentage point on Wednesday and signaled further cuts would follow, kicking off its first easing cycle since the pandemic began.
The US Federal Reserve’s first cut in more than four years will range from 4.75 percent to 5 percent in the federal funds rate. Michael Bowman, a member of the Federal Open Market Committee, voted in favor of the quarter-point cut — the first Fed governor to rule out a rate cut since 2005.
The bumper half-point cut suggests the U.S. central bank is seeking to preempt any weakness in the U.S. economy and labor market, which has kept rates at their highest levels since 2001 for more than a year.
The last time the central bank cut rates by more than a quarter point was in 2020, when Covid-19 tore through the global economy.
“The U.S. economy is in a good place, and our decision today is designed to keep it there,” Fed Chairman Jay Powell said at a news conference on Wednesday. “This readjustment of our policy stance will help maintain the strength of the economy and the labor market, and continue further improvement in inflation as we begin the process of moving toward a neutral stance.”
Powell said rates were not on a “preset” path, noting that if inflation proved sticky, the Fed “could withdraw policy reins even more slowly.” Likewise, if the labor market weakens unexpectedly, the central bank is “ready to respond,” he added.
“We don’t think we’re lagging behind [in cutting rates]” said Pavel. “But you can take this as a sign of our determination not to back down.”
In a statement Wednesday, the FOMC remained “overly optimistic” about inflation, even if it remained “somewhat elevated.”
U.S. stocks rallied immediately after the announcement, peaking shortly after Powell began his press conference. The S&P 500, which was flat earlier in the day, rose as much as 1.1 percent, briefly beating its intraday record, but closed slightly lower on the day.
The Treasury yield curve steepened and spread between the 10-year and two-year bonds, an indicator of future growth expectations, last reaching levels seen in June 2022.
The yield on the policy-sensitive two-year note fell 0.06 percentage points to 3.59 percent following the central bank’s announcement, but later rose to 3.63 percent. Bond yields move inversely with prices.
Asian markets rose on Thursday morning. Mainland China’s CSI 300 stock index rose 0.8 percent, Hong Kong’s Hang Seng index rose 1.8 percent and Japan’s TOPIX rose 2.4 percent.
The yen weakened to ¥143.2 against the dollar after crossing ¥140 earlier in the week as traders expected the Bank of Japan would not raise rates at a policy meeting due to end on Friday.
In the latest “dot plot” of officials’ projections, the policy rate is expected to fall to between 4.25 percent and 4.5 percent by the end of 2024, suggesting another big half-point cut in the remaining two meetings this year, or two quarter-point cuts. Overall, this is a significantly larger reduction than the quarter-point reduction projected by most officials in June, when the dot plot was last updated.
Two of the 19 officials thought the Fed should hold off after Wednesday’s cut, while seven others forecast just one more quarter-point cut this year.
Policymakers expect the funds rate to drop another percentage point in 2025, to 3.25 percent and 3.5 percent by the end of the year. By the end of 2026, it is estimated to fall below 3 percent.
Some analysts said the central bank’s decision pointed to underlying concerns about the economy.
said Jack Manley, global market strategist at JP Morgan Asset Management. “The macro data is not nearly as clear as we would like. The central bank is looking at this economy and saying: ‘We’re making more progress on inflation than we thought, but the labor market is starting to slip, and we think it’s going to get worse.’ This is not a good sign for me.
Wednesday’s decision was a milestone for the central bank, which has battled inflation for more than two years — and a significant moment in this year’s presidential election.
Borrowing costs could be a boon for Democratic candidate Kamala Harris. Even as the US economy continues to grow, his campaign has been plagued by voter dissatisfaction with the high cost of living.
President Joe Biden welcomed the Fed’s move, saying in a post on X: “We’ve reached a critical moment: inflation and interest rates are falling when the economy is strong. Critics said it couldn’t happen — but our policies are cutting costs and creating jobs.”
The cut comes as central bank officials grow more confident that inflation is under control and turn their attention to the health of the labor market.
After rising to 7 percent in 2022, the price index for personal consumption expenditures was just 2.5 percent in July, close to the central bank’s 2 percent target.
But while jobs growth has cooled in recent months and the number of Americans filing for unemployment benefits is at a historic low, other measures of demand, such as vacancies, have also slowed.
The central bank has made clear it does not want to see the labor market weaken further amid concerns it will wait longer to loosen its grip on the economy by lowering borrowing costs.
In forecasts released Wednesday, most officials forecast the unemployment rate to remain at 4.4 percent over the next two years, up from the current 4.2 percent and higher than June estimates, while economic growth is expected to stabilize at a 2 percent rate. The next few years.
Officials forecast PCE will return to target in 2026, and a benign inflationary backdrop. The median estimate for “core” inflation, which strips out volatile food and energy prices, was cut to 2.6 percent for the year. 2.2 percent and 2 percent in the next two years.
