Fed cuts interest rate by 0.5%

Fed cuts interest rate: ©Aaronkohr - stock.adobe.com

As expected, the Federal Reserve Bank cut interest rates to counter a cooling economy, opting for a half-point reduction. The last interest rate cut was in March of 2020 in response to the pandemic. Since that time, the Fed has raised rates 11 times in an attempt to get inflation closer to its preferred 2% rate.

The new federal funds rate range now stands between 4.75% and 5%, a decision that aligns with market expectations, which had recently shifted from anticipating a smaller 25 basis-point cut.

This decision, the largest reduction since the 2008 global financial crisis, comes as both inflation and job growth have shown signs of easing. The Fed justified the cut, citing progress toward its goal of reducing inflation to 2%, along with a balanced assessment of the risks to both employment and inflation. The committee also signaled that additional cuts of up to 50 basis points are likely by the end of the year, bringing the total projected rate cuts to 2 percentage points by 2026.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2%,” the post-meeting statement read. The vote was not unanimous, however, with Governor Michelle Bowman preferring a smaller quarter-point reduction.

Despite robust growth in Gross Domestic Product (GDP), the decision comes amid increasing concerns about the labor market. The unemployment rate has crept up to 4.2%, still considered full employment but higher than last year’s levels. Hiring has slowed significantly, with the monthly hiring rate now at its lowest since the Great Recession, even as inflation remains modestly above the Fed's 2% target.

The committee revised its economic outlook, adjusting the unemployment projection upward to 4.4% and lowering the inflation forecast for the year to 2.3%. These revised projections reflect a cautious optimism about the future of inflation control.