The Federal Reserve on Wednesday announced a long-awaited interest rate cut, lowering the benchmark rate by 50 basis points from what was the highest level in 23 years as the central bank eased borrowing costs following progress in the fight against inflation.
The Fed’s first interest rate cut since March 2020 lowers the benchmark federal funds rate to a range of 4.75% to 5%.
Interest rates had been at a range of 5.25% to 5.50% since July 2023, the highest level since 2001, as the central bank monitored economic data for signs that stubborn inflation was trending toward its 2% target.
Recent months delivered signs of progress that inflation is heading toward the Fed’s target, although the latest data showed it isn’t quite there yet. Inflation slowed to 2.5% on an annual basis in August, down from 2.9% the month before and well below this inflationary cycle’s peak of 9.1% in June 2022.
US ECONOMISTS SEND FED WARNING ON PRICE INCREASES AHEAD OF ANTICIPATED RATE DECISION: ‘BE CAUTIOUS’
Federal Reserve Chair Jerome Powell previously signaled that the central bank didn’t plan to wait for inflation to reach 2% to cut interest rates.
Powell explained in July that “if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%.”
INFLATION RISES 2.5% IN AUGUST, LESS THAN EXPECTED
A slowdown in hiring has raised concerns about the labor market and the economy potentially slipping into a recession, prompting speculation that the Fed could opt for a 50 basis point cut to interest rates.
The central bank typically chooses to move forward with a smaller 25 basis point cut at the start of a rate-cutting cycle, though it has made larger cuts when there is a higher degree of economic uncertainty.
It most recently opted for larger 50 basis point cuts in March 2020 as the COVID-19 pandemic began, as well as in September 2007 amid the housing crisis and in January 2001 when the dot-com bubble burst.
FED’S ACTIONS SPOKE LOUDER THAN WORDS TO MARKETS IN FIGHT AGAINST INFLATION, RESEARCH FINDS
Markets fully priced in a 25-basis-point rate reduction ahead of the Fed’s decision on Wednesday, although traders increasingly expected the Fed to cut rates by 50 basis points in the lead up to the announcement.
According to the CME FedWatch tool, the probability of a 50 basis point cut rose from 25% a month ago to 64% the day before the Fed’s decision.
Wednesday’s rate cut decision is expected to be the first in a series of moves to lower interest rates. Prior to the Fed’s announcement, markets expected the Fed to announce further rate cuts at its meetings in the months ahead, as the CME FedWatch tool sees a slightly more than 50% probability rates will be lowered to a range of 4.5% to 4.75% in November.
“The markets got what they wanted – a big first cut by the Fed,” said Chris Larkin, managing director of trading and investing at E*TRADE from Morgan Stanley. “Beyond how hot or cold the economy runs, that may largely depend on what the Fed has to say about how fast and far it sees rates dropping from here.”
The Federal Reserve’s next policy meeting will be held Nov. 6-7, right after Election Day on Nov. 5, while the final meeting of the year will be held Dec. 17-18.
Read the full article here
