The Federal Reserve cut interest rates by half a percentage point on Wednesday and signaled further cuts, kicking off its first easing cycle since the pandemic began.
The Federal Reserve cut interest rates for the first time in more than four years, leaving the federal funds rate in a range of 4.75% to 5%. Federal Open Market Committee member Michelle Bowman voted for the quarter-point cut, marking the first time since 2005 that a Fed governor has voted against an interest rate decision.
It signals that the U.S. central bank is trying to forestall a weakening of the U.S. economy and labor market after keeping interest rates at their highest levels since 2001 for more than a year.
The last time the Federal Reserve cut interest rates by more than a quarter of a percentage point was in 2020, when the coronavirus pandemic hit the global economy.
“The U.S. economy is doing well, and today’s decisions are intended to keep it that way,” Fed Chairman Jerome Powell said at a press conference on Wednesday. “This recalibration of the policy stance will help maintain the strength of the economy and labor market and will allow inflation to move further forward as we begin the process of moving to a more neutral stance.”
Powell said interest rates are not on a “preset” trajectory and that the Fed “may ease policy restraints more slowly” if inflation is persistent. He added that the Fed is “prepared to respond” if the labor market weakens unexpectedly.
“We don’t believe we’re behind,” Powell said, “but please see this as a signal of our determination not to fall behind.”
In its statement on Wednesday, the FOMC said that while inflation remains “moderately elevated,” “confidence has increased” about inflation.
U.S. stocks soared immediately after the announcement, hitting record highs shortly after Chairman Powell began his press conference. The S&P 500, which had been stable early in the day, rose 1.1% at one point, briefly surpassing its intraday high, but then closed slightly lower.
The Treasury yield curve has surged, with the spread between 10-year and two-year yields, a gauge of future growth expectations, reaching its highest level since June 2022.
The yield on the policy-sensitive two-year Treasury note fell 0.06 percentage point to 3.59 percent after the Fed’s announcement before rising to 3.63 percent. Bond yields move inversely to prices.
Asian markets rallied on Thursday morning, with mainland China’s CSI 300 stock index rising 0.8%, Hong Kong’s Hang Seng Index up 1.8% and Japan’s Topix rising 2.4%.
The yen fell to 143.2 yen against the dollar after rising above 140 yen earlier in the week as traders expected the Bank of Japan to not raise interest rates at its policy meeting ending on Friday.
In their latest “dot plot” of forecasts, officials largely see the policy rate falling to 4.25% to 4.5% by the end of 2024, implying another big half-point cut or two quarter-point cuts at one of the two remaining meetings this year. Overall, that’s a much bigger cut than the quarter-point cut most officials predicted in June, when the dot plot was last updated.
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Two of the 19 officials who compiled the forecasts believe the Fed should hold off on cutting rates after Wednesday’s cut, while the other seven expect just one more quarter-point cut this year.
Policymakers also expect the federal funds rate to fall another percentage point in 2025, to between 3.25 percent and 3.5 percent by the end of the year. By the end of 2026, rates are projected to be just below 3 percent.
Some analysts said the Fed’s decision indicated underlying concerns about the economy.
“The picture is very unclear,” said Jack Manley, global market strategist at JPMorgan Asset Management. “The macro data is not as clear as we would have liked. The Fed is looking at this economy and saying, ‘Inflation is coming in faster than we expected, but the labor market is starting to slip and could get worse.’ To me that’s not a good sign.”
Wednesday’s decision marks a milestone for the central bank after more than two years of battling inflation and also marks a key juncture in this year’s presidential election.
Lower borrowing costs would be a boon for Democratic candidate Kamala Harris, who has been dogged by voter anxiety about the rising cost of living despite a strong U.S. economy.
President Joe Biden welcomed the Fed’s move in a post on X, saying, “We reach a pivotal moment: Inflation and interest rates are falling while the economy remains strong. Critics said it couldn’t be, but our policies are lowering costs and creating jobs.”
The cut comes as Fed officials grow more confident that inflation is under control and shift their focus to the health of the labor market.
The personal consumption expenditures price index peaked at about 7% in 2022 before climbing just 2.5% in July, closer to the Fed’s 2% target.
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But job growth has slowed in recent months, even as the number of Americans applying for unemployment benefits remains historically low, and other indicators of demand, such as the number of job openings, have also slowed.
The Fed has made clear it does not want to allow the labor market to weaken further amid concerns that it has taken too long to ease the squeeze on the economy by lowering borrowing costs.
In forecasts released Wednesday, most officials now expect the unemployment rate to rise to 4.4% over the next two years from the current 4.2%, higher than projected in June, while economic growth will stabilize at 2% over the next few years.
The agency also projects a more benign inflation environment, with PCE returning to its target in 2026. The median forecast for “core” inflation, which excludes volatile food and energy prices, is revised downward to 2.6% this year, before declining to 2.2% and 2% over the following two years.
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