The Federal Reserve slashed its key lending rate by half a percentage point — the high end of expectations on Wall Street — in a bet that the wobbly jobs market has become a bigger risk to the economy than inflation.
Stocks surged in reaction to the news as the central bank’s move — the first time in four years it has cut interest rates — confirms recent bets on Wall Street that the central bank would opt for a jumbo interest rate cut over a quarter-point cut.
With inflation barely above target levels, Fed officials have been shifting their focus toward supporting a weakening job market and achieving a rare “soft landing,” whereby it curbs inflation without causing a sharp recession.
“The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the US central bank’s rate-setting committee said in their latest statement, which drew a dissent from Governor Michelle Bowman who favored only a quarter-percentage-point cut.
Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75%-3.00% range.
The endpoint reflects a slight upgrade, from 2.8% to 2.9%, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.
Even though inflation “remains somewhat elevated,” the Fed statement said policymakers chose to cut the overnight rate to the 4.75%-5.00% range “in light of the progress on inflation and the balance of risks.”
The Fed “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” with attention to “both sides of its dual mandate” for stable prices and maximum employment.
This week’s move is expected to be only the first in a series of Fed rate cuts that will extend into 2025.
“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained,” Fed Chair Jerome Powell said in a statement to reporters.
Powell said that the central bank anticipates “continuing to remove restriction” — which is another way of saying there will be more rate cuts.
“We know that it is time to recalibrate our policy to something that is more appropriate,” Powell said.
“This is the beginning of that process.”
Powell said that “we will move as fast or as slow” as policymakers consider appropriate based on economic data.
When asked how steep future rate cuts will be, Powell said that those decisions will be made “meeting by meeting.”
“We are not on any preset course,” Powell said.
High interest rates and elevated prices for everything from groceries to gas to rent have fanned widespread public disillusionment with the economy and provided a line of attack for former President Donald Trump’s campaign.
Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers much further.
Over time, Fed rate cuts should lower borrowing costs for mortgages, auto loans and credit cards, as well as for business loans.
Business spending could grow, and so could stock prices. Companies and consumers could refinance loans into lower-rate debt.
Powell made clear last month in a high-profile speech that Fed officials feel confident that inflation has largely been defeated.
It has plummeted from a peak of 9.1% in June 2022 to 2.5% last month, not far above the Fed’s 2% target.
Central bank officials fought against spiking prices by raising their key interest rate 11 times in 2022 and 2023 to a two-decade high of 5.3% to try to slow borrowing and spending, ultimately cooling the economy.
With Post Wires