Fed Reduces Rates by Half Point

The Federal Reserve has cut its benchmark interest rate by a substantial half-point.

"By lowering interest rates, we could lower borrowing costs, encourage businesses to expand and hire more workers."

Lowering interest rates can preserve the labor market gains achieved over the past two years. @Regmi_Ira's insights in @Nasdaq 🔻 https://t.co/oPJsA9dARR

— Roosevelt Institute (@rooseveltinst) September 23, 2024

This marks a significant shift after more than two years of high rates aimed at combating inflation, which had made borrowing expensive for American consumers. The rate cut is the Fed’s first in over four years and highlights a new focus on supporting the job market, which has recently shown signs of slowing.

TRADERS BOOST ODDS OF HALF-POINT NOVEMBER FED RATE CUT TO 50%

— *Walter Bloomberg (@DeItaone) September 24, 2024

In a news conference, Federal Reserve Board Chairman Jerome Powell described the rate cut as a declaration of victory over inflation. Inflation has fallen from a peak of 9.1% in June 2022 to a more manageable 2.5% last month. The Fed indicated potential further reductions, suggesting it may cut the rate by another half a percentage point this year and expects four more cuts in 2025 and two in 2026.

This is thank to the Biden-Harris administration's leadership to get our economy on the right track after the #COVID19 pandemic and create over 15 million jobs. So let's be clear on who is really equipped to grow our economy! (Hint: It's @KamalaHarris.) https://t.co/eRFFWJ09yq

— Glynda Carr (@glyndacarr) September 23, 2024

The central bank’s action lowered its key rate to approximately 4.8%, down from a two-decade high of 5.3%, where it had remained for 14 months as it worked to curb the worst inflation streak in four decades. This move comes just weeks before the presidential election, potentially reshaping the economic landscape as Americans prepare to vote. With inflation now at a three-year low and approaching the Fed’s 2% target, this rate cut reflects an overall optimistic outlook for economic stability and growth.

The central bank appears confident that the job market can strengthen without reigniting inflationary pressures. The rate cut is expected to provide the U.S. economy with much-needed relief from elevated borrowing costs. President Joe Biden acknowledged the Fed’s success, emphasizing its importance at this critical juncture.

Stocks saw brief volatility following the announcement, reflecting the market’s anticipation of the central bank’s plan. The decision to cut by half a point was not unanimous, indicating the urgency among central bankers to address economic pressures swiftly.

Fed cuts rates to combat inflation

Fed Chair Jerome Powell stated that the move underscores the Fed’s commitment to responding appropriately to the economy’s needs. However, Fed Governor Michelle Bowman dissented, preferring a smaller, quarter-point cut. This was the first dissent from a Fed governor since 2005.

The Fed’s forecast includes additional rate cuts by the end of the year, which contrasts with the single cut projected for 2024 in June. Central bankers also expect the unemployment rate to rise to 4.4% from the current 4.2% as of August. Despite aggressive actions, inflation currently stands significantly below the 40-year highs of summer 2022, indicating progress without triggering a recession.

Federal Reserve Chairman Jerome Powell expressed optimism about the U.S. economy’s broader outlook. He emphasized that the labor market remains strong and that the Fed’s recent policy actions aim to sustain economic stability. Employers are still adding jobs, and unemployment rates remain low.

Powell addressed questions about the Fed’s independence amidst political pressures, particularly with the upcoming presidential election. Former President Donald Trump has criticized Powell and suggested greater political control over monetary policy, which Powell argues would undermine the soundness of the Fed’s decisions. The Fed maintains its apolitical stance, focusing solely on economic indicators.

The Federal Reserve is navigating a challenging economic environment, balancing inflation control with maintaining a strong labor market. The recent rate cut signifies the Fed’s proactive stance in ensuring economic stability while facing potential political scrutiny. As the year progresses, the Fed’s actions will continue to be closely monitored by both Wall Street and Main Street, reflecting the ongoing challenges and opportunities in managing the U.S. economy.