This is the first time in more than four years that the US Federal Reserve has cut interest rates. Today’s rate cuts start the cycle of reversing the restrictive conditions put in place to keep inflation at bay.
” In considering additional adjustments to some targets for the level of federal funds, the Committee will carefully assess incoming data, developing prospects, and the balance of risks. The Committee will continue to reduce the holdings of Treasury securities and debt agencies and mortgage agencies‑ securities supported by the Committee It is committed to supporting maximum employment and returning inflation to the 2 percent target,” the FOMC said.
US Federal Reserve Rate Cut: Key Points
- The Fed delivered a half-of-a-percentage-point cut as part of an expected 100 basis-point reduction for the year.
- The US Federal Reserve’s latest economic projections, released on Wednesday after its September 17-18 meeting, show that the central banker expects to cut interest rates to a range of 4.25%-4.50% by the end of the year. This projection range is lower than anticipated in June, as inflation approaches the 2% target and unemployment rises.
- The Fed’s current target range for its short-term lending benchmark is 4.75%-5.00%, and the projection suggests that policymakers expect a quarter-point interest rate cut at the two remaining meetings this year, scheduled for November and December.
- Looking ahead, the median Fed policymaker projects a policy rate of 3.4% by the end of 2025, meaning an additional four-quarter percentage points in 2024.
- The policy rate is expected to reach 2.9% in late 2026 and 2027, indicating a return to what the median Fed policymakers consider a neutral rate.
- The projection is a change from the Fed’s June projection, which had been anticipated to reduce only a quarter of a point in all of 2024. The change in outlook comes as inflation has decreased from an unexpected reading at the beginning 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 is based on progress being made toward its inflation target and an assessment that risks to the mandate are now “roughly balanced.” However, the decision was not unanimous, with Fed Governor Michelle Bowman not agreeing to a smaller quarterly cut.
- It is important to note that these projections reflect the views of individual policymakers rather than an agreed consensus. Two of the Fed’s 19 policymakers think no further rate cuts are needed this year, while seven believe only one additional quarter percentage point cut is needed. On the other hand, only one policymaker expects more rate cuts this year than the median view.
As of July 2023, when the central bank finally raises interest rates by 25 basis points to a range of 5.25% to 5.50% to tackle inflation, borrowing costs remain at their highest levels in two decades. Recently, however, attention has shifted to the moderating labor market.
The latest US economic data shows that job growth, while slowing from the high levels seen during the COVID-19 pandemic, remains in positive territory, according to a Reuters report. Retail sales and industrial production figures released on Tuesday exceeded expectations, and the Atlanta Fed’s model, which estimates economic growth based on incoming data, showed that the economy now grew at an annual rate of 3.0% in the third quarter, exceeding the central bank’s estimate. the potential of the US economy.
After the pandemic, a perfect storm of factors, including shortages of goods, significant spending, labor shortages, large government deficits, and aggressive corporate pricing, pushed inflation to its highest level in 40 years in 2022.
Although wage growth has been strong and outpaced price increases for many workers, sentiment has remained negative for much of the time. The Federal Reserve raised interest rates to slow the economy, which led to higher mortgage rates and banks tightening credit for various loans and borrowers.
The Fed’s preferred measure of inflation is currently just half a percentage point above the central bank’s target, and is expected to decline gradually through the remainder of 2024 and into the year after.
Despite the challenges, the economy has fared better than anticipated by almost every measure.
This year, the US stock market has rallied, with all three major indexes hitting record highs on expectations of lower interest rates as inflation eases and the job market shows signs of a gradual cooling.