The move marks the beginning of the end of the Fed’s high interest rate environment aimed at throttling demand.
The US Federal Reserve cut its key lending rate by half a percentage-point Wednesday in its first reduction for more than four years, sharply lowering borrowing costs shortly before November’s presidential election.
The Fed’s decision will affect the rates at which commercial banks lend to consumers and businesses, bringing down the cost of borrowing on everything from mortgages to credit cards.
The move marks the beginning of the end of the Fed’s high interest rate environment aimed at throttling demand, with inflation now easing towards the central bank’s long-term two-percent target and the labor market continuing to cool amid a surprisingly resilient post-Covid economy.
Against this backdrop, Wednesday’s large Fed rate cut is probably good news for Democratic presidential candidate and US Vice President Kamala Harris, who is running against Republican former president Donald Trump in the upcoming election.
“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” Harris said in a statement.
At an event in New York on Wednesday, Trump told reporters that the independent US central bank’s decision was either a response to a “very bad” economy, or it had been “playing politics.”
“But it was a big cut,” he added.
Major US stock indices finished lower following the Fed’s decision.
– 11-to-1 in favour –
Policymakers voted 11-to-1 in favor of lowering the central bank’s benchmark rate to between 4.75 percent and 5.00 percent, the Fed announced in a statement.
They also penciled in an additional half-point of cuts before the end of this year, and an added percentage-point of cuts in 2025.
“It is time to recalibrate our policy to something that is more appropriate, given the progress on inflation, and on employment moving to a more sustainable level,” Fed Chair Jerome Powell told reporters after the decision was announced.
“This is the beginning of that process,” he added.
Analysts had widely expected the Fed to reduce rates on Wednesday, but were uncertain if it would cut by 25 basis points or 50.
A smaller cut would have been a more conventional step, while the larger move does more to stimulate demand, but also carries a greater risk of reigniting inflation.
“I was a little surprised it was 50 (basis points) and not 25, but I think the chairman did a nice job of explaining,” former Boston Fed president Eric Rosengren told AFP.
The Fed’s rate-setting committee most likely went for the larger cut in response to recent weaker-than-expected jobs data and the “very positive news” on inflation, added Rosengren, a visiting scholar at MIT.
“I don’t think it’s panic. I think it’s more a strategic decision by the Fed,” Citi global chief economist Nathan Sheets told AFP, adding that the next steps were “not so clear.”
In updated forecasts published alongside the Fed’s rate decision, policymakers’ median projections pointed to an unemployment rate of 4.4 percent in the fourth quarter of this year, up from 4.0 percent in the last update in June.
They also penciled in an annual headline inflation rate of 2.3 percent, slightly lower than in June.
Futures traders see a roughly 65-percent chance that the Fed will cut by at least another 75 basis points this year, according to CME Group data.
– Election Stakes –
The Fed has a dual mandate from Congress to act independently to tackle both inflation and employment.
But its decision will nevertheless have political ramifications, given the importance of inflation and the cost of living to US consumers in this presidential election.
Trump has repeatedly criticized Powell, whom he first appointed to run the Fed, and recently suggested that the US president should have “at least” a say over rate decisions.
On Wednesday, Fed Chair Powell said the bank’s independence was “good for the public,” adding that he hoped and believed that this arrangement would continue.
“We’re not serving any politician, any political figure, any cause, any issue, nothing,” he added, in response to a question about the Fed’s independence.
