Federal Reserve Chairman Jerome Powell held a press conference following the rate cut decision. Watch his opening remarks in the video above.
WASHINGTON (AP) — The Federal Reserve cut its benchmark interest rate by an unusually enormous half a percentage point on Wednesday, a dramatic reversal after more than two years high prices While this helped curb inflation, it also made credit unbearably high-priced for American consumers.
The rate cut, the Fed’s first in more than four years, reflects its novel focus on strengthening the labor market, which has shown clear signs of weakening. Just weeks before the presidential election, the Fed’s move could also shake up the economic landscape just as Americans prepare to vote.
The central bank cut its benchmark interest rate to around 4.8% after holding it at 5.3% for 14 months, a two-year high, as it struggled to contain the worst wave of inflation in four decades. Inflation has fallen from a peak of 9.1% in mid-2022 to a three-year low of 5.3%. 2.5% in Augustnot far above the Fed’s 2% target.
Fed policymakers also signaled that they expect a further half-percentage point cut in the key interest rate at their last two meetings of the year in November and December. And they expect four more rate cuts in 2025 and two in 2026.
In a statement, the Fed came closer than ever to defeating inflation, saying it had “gained greater confidence that inflation is moving toward 2% on a sustained basis.” Wall Street initially welcomed the news, with stock prices rising slightly and bond yields falling.
“We know it is time to adjust our (interest rate) policy to a level that is more appropriate given developments in inflation,” Fed Chairman Jerome Powell said at a press conference.
Although the central bank now believes inflation has been largely defeated, remain livid Prices for food, gasoline, rent and other indispensable goods remain high. Former President Donald Trump has blamed the Biden-Harris administration for inflation. Vice President Kamala Harris, in turn, has accused Trump’s promise to impose tariffs on all imports of raising prices even further for consumers.
Fed interest rate cuts are likely to lead to lower borrowing costs over time for mortgagesAuto loans and credit cards, strengthening Americans’ finances and supporting more spending and growth. Homeowners can refinance mortgages at lower interest rates and save on monthly payments, and even convert credit card debts into cheaper personal loans or home equity loans. Companies can also borrow more and invest. Average mortgage rates have already fallen to 18 months Low of 6.2%said Freddie Mac, which has led to a pointed boost in the need for refinancing.
At his press conference, Powell was asked whether the Fed’s decision to cut its benchmark interest rate by an unusually enormous half a percentage point was an admission that it had waited too long to cut rates.
“We don’t think we’re behind,” he replied. “We think this is the right time. But I think you can see this as a sign of our determination not to fall behind. We’re not seeing claims rising, we’re not seeing layoffs rising, we’re not hearing anything from companies that this is going to happen.”
He added: “The view is that the right time to support the labour market is when it is strong, not when there are layoffs. We do not believe that we need further easing of labour market conditions to bring inflation down to 2%.”
In an updated set of forecasts, Fed policymakers now collectively expect inflation to fall faster than they did three months ago, but also higher unemployment. They forecast their preferred inflation gauge to fall to 2.3% by year-end from 2.5% now and to 2.1% by the end of 2025. And they now expect the unemployment rate to rise further this year, to 4.4% from 4.2% now, and to remain at that level through the end of 2025. That’s above their previous forecasts of 4% for the end of this year and 4.2% for 2025.
The Fed’s next meeting is Nov. 6-7 – immediately after the presidential election. By cutting rates this week, just before the election, the Fed risks attacks from Trump, who has argued that cutting rates now would amount to political interference. However, Politico has reported that even some key Senate Republicans who were interviewed expressed support for a Fed rate cut this week.
Central bank officials fought high inflation by raising their benchmark interest rate 11 times in 2022 and 2023. Wage growth has slowed since then, removing a potential source of inflationary pressure. And oil and gas prices are falling, a sign that inflation is likely to frigid further in the coming months. Consumers are also push back against high prices, to force such companies like Target and McDonald’s lure customers with special offers and discounts.
The Fed’s decision on Wednesday sparked dissent from a board member for the first time since 2005. Michelle Bowman, a board member who has expressed concerns in the past that inflation has not been fully defeated, said she would have preferred a quarter-percentage point rate cut.
After several years of mighty employment growth, employers have slowed hiring and the unemployment rate has increased nearly a full percentage point from its half-century low in April 2023 to a still-low 4.2%. Once unemployment rises that high, it tends to keep rising. But Fed officials and many economists point out that the rise in unemployment this time reflects an influx of job seekers – particularly novel immigrants and college graduates – rather than layoffs.
“The labor market is actually in solid shape,” Powell said on Wednesday. “With our policy move today, we want to keep it that way.”
