The Federal Reserve slashed its key lending rate by half a percentage point — the high end of expectations on Wall Street — in a bet that the wobbly jobs market has become a bigger risk to the economy than inflation.
“The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the US central bank’s rate-setting committee said in their latest statement, which drew a dissent from Governor Michelle Bowman who favored only a quarter-percentage-point cut.
Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75%-3.00% range.
The endpoint reflects a slight upgrade, from 2.8% to 2.9%, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.
Even though inflation “remains somewhat elevated,” the Fed statement said policymakers chose to cut the overnight rate to the 4.75%-5.00% range “in light of the progress on inflation and the balance of risks.”
The Fed “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” with attention to “both sides of its dual mandate” for stable prices and maximum employment.
Stocks surged in reaction to the news as the central bank’s move — the first time in four years it has cut interest rates — looks like the first step in a series of measures to prop up the US economy.
Wall Street investors had bet that the central bank would opt for a jumbo interest rate cut over a quarter-point cut.
With inflation barely above their target level, Fed officials have been shifting their focus toward supporting a weakening job market and achieving a rare “soft landing,” whereby it curbs inflation without causing a sharp recession.
A half-point rate cut would signal that the Fed under Powell is as determined to sustain healthy economic growth as it is to conquer high inflation.
This week’s move is expected to be only the first in a series of Fed rate cuts that will extend into 2025.
High interest rates and elevated prices for everything from groceries to gas to rent have fanned widespread public disillusionment with the economy and provided a line of attack for former President Donald Trump’s campaign.
Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers much further.
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.
Powell made clear last month in a high-profile speech that Fed officials feel confident that inflation has largely been defeated.
It has plummeted from a peak of 9.1% in June 2022 to 2.5% last month, not far above the Fed’s 2% target.
Central bank officials fought against spiking prices by raising their key interest rate 11 times in 2022 and 2023 to a two-decade high of 5.3% to try to slow borrowing and spending, ultimately cooling the economy.
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