This is the first time in four years that the US Federal Reserve has cut interest rates. Today’s rate cut has begun a cycle of reversing the restrictive conditions imposed to keep inflation under control.
“When considering additional adjustments to the target range for the federal funds rate, the Committee will carefully evaluate incoming data, the emerging outlook, and the balance of risks. The Committee will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities. The Committee remains strongly committed to supporting maximum employment and returning inflation to its 2 percent goal,” the FOMC statement said.
US Federal Reserve rate cut: Key points
- The Fed cut rates by half a percentage point as part of an expected 100 basis points reduction for the year.
- The US Federal Reserve’s latest economic projections, released on Wednesday after its September 17-18 meeting, indicate that central bankers expect to lower interest rates to a range of 4.25%-4.50% by the end of the year. This projection range is lower than the one they projected in June, as inflation is approaching their 2% target and unemployment is rising.
- The current target range for the Fed’s short-term lending benchmark is 4.75%-5.00%, and estimates suggest policymakers expect a quarter-point rate cut at the remaining two meetings this year in November and December.
- Looking ahead, the average Fed policymaker forecasts a policy rate of 3.4% by the end of 2025, implying an additional four quarter-percentage cuts in 2024.
- The policy rate is expected to reach 2.9% by the end of both 2026 and 2027, signaling a return to the rate that Fed policymakers now consider the neutral rate.
- These projections represent a change from the Fed’s June projections, which anticipated a reduction of only a quarter point in 2024. This change in outlook comes at a time when inflation has eased from unexpectedly strong levels at the start of the year, while the unemployment rate has risen to 4.2%, more than half a percentage point higher than when the Fed began its rate-hike campaign in March 2022.
- The Fed’s decision to cut rates was based on progress made toward its inflation target and its assessment that risks to both of its mandates are now “roughly in balance.” However, the decision was not unanimous, with Fed Governor Michelle Bowman dissenting in favor of a smaller quarter-point cut.
- It’s important to note that these projections reflect the views of individual policymakers rather than any consensus. Two of the Fed’s 19 policymakers believed no further rate cuts were needed this year, while seven believed only an additional quarter-percentage point reduction would be needed. On the other hand, only one policymaker expected rates to be cut more this year than the average outlook.
Borrowing costs have remained at their highest in more than two decades since July 2023, when the central bank raised interest rates by 25 basis points to a range of 5.25% to 5.50% to address inflation. More recently, however, attention has shifted to a restrained labor market.
The latest U.S. economic data shows that job growth, while slowing from the high levels seen during the COVID-19 pandemic, remains in positive territory, Reuters reports. Retail sales and industrial production data released on Tuesday exceeded expectations, and the Atlanta Fed’s model, which forecasts economic growth based on incoming data, indicates that the economy is currently growing at a 3.0% annual rate in the third quarter, surpassing the central bank’s estimates of the U.S. economy’s potential.
Following the pandemic, a perfect storm of factors including commodity shortages, significant spending, labour shortages, large government deficits and aggressive corporate pricing pushed inflation in 2022 to its highest level in 40 years.
Although wage growth was strong and outpaced price increases for many workers, sentiment remained negative for most of the time. The Federal Reserve raised interest rates to slow the economy, which caused home mortgage rates to rise and banks tightened lending for various loans and borrowers.
The Fed’s preferred inflation measure is now just half a percentage point above the central bank’s target, and it is expected to decline slowly through the remainder of 2024 and into next year.
Despite the challenges, the economy has performed better than expected on almost all parameters.
This year, US stock markets have surged, with all three major indexes hitting record highs, as interest rates are expected to fall with inflation moderating and the job market gradually showing signs of a slowdown.
