The US Federal Reserve decided to cut interest rates by 50 basis points, from 5.5% to 5.00%.
The US Federal Reserve on Wednesday approved its first interest rate cut since the early days of the Covid-19 pandemic, cutting rates by half a percentage point in an attempt to avoid a slowdown in the labor market.
With both the jobs market and inflation weakening, the Federal Open Market Committee (FOMC) opted to cut its key interest rate by 50 basis points, in line with market expectations that had recently shifted toward a cut of this magnitude.
Other than emergency cuts during the Covid pandemic, the last time the Fed cut interest rates by half a percentage point was in 2008 during the global financial crisis.
This decision lowers the federal funds rate to a range between 4.75% and 5%.
Although this rate determines banks' short-term borrowing costs, it has an impact on many consumer products such as mortgages, personal loans, and credit cards.
Along with the cut, the committee projected an additional 50 basis points of cuts by the end of the year, roughly in line with market expectations. Officials projected an additional 1% cut by the end of 2025, and an additional half-point in 2026. Overall, the benchmark rate is expected to fall by 2% after Wednesday’s move.
The committee said in its statement after the meeting: "The committee increased its confidence that inflation is moving towards 2 percent in a sustainable manner, and considers that the risks to achieving the employment and inflation goals are balanced."
The decision to cut rates was made in light of “progress on inflation and the balance of risks.” The committee voted 11-1, with Governor Michelle Bowman favoring a quarter-point cut.
In its assessment of the state of the economy, the committee noted that “job growth has slowed and the unemployment rate has risen but remains low.” Officials also raised their forecast for the unemployment rate this year to 4.4% from 4% in the previous June update, and lowered their inflation forecast to 2.3% from 2.6%.
Despite the strength of economic indicators, the Federal Reserve decided to proceed with the rate cut. GDP has been growing steadily, and the Atlanta Fed expects 3% growth in the third quarter thanks to continued strength in consumer spending.
The cut comes even though inflation indicators remain above the Fed's 2% target, with its preferred measures showing inflation hovering around 2.5%.
The decision is expected to have a global impact, as the Federal Reserve is at the heart of the global financial system, and several other central banks have already begun cutting interest rates.
Despite this decision, the Federal Reserve left its bond-reduction program in place.
