Fed unveils major rate cut as it gains ‘greater confidence’ in inflation

Even though the Fed’s policy decision came just about seven weeks before the U.S. presidential election, it initially elicited a fairly muted reaction from presidential candidates

Reuters Agency

September 19, 2024, 09:00

Last Modified: September 19, 2024, 09:07

The eagle atop the facade of the Federal Reserve Building in Washington, July 31, 2013. Photo: Reuters

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The eagle atop the facade of the Federal Reserve Building in Washington, July 31, 2013. Photo: Reuters

The U.S. central bank kicked off a series of expected rate cuts on Wednesday with a larger-than-usual half-percentage-point cut, Federal Reserve Chairman Jerome Powell said, meant to show policymakers’ determination to keep the unemployment rate low now that inflation has fallen.

“We got off to a good, strong start, and I’m very pleased that we did,” Powell said at a news conference after the Fed, noting its growing confidence that the nation’s battle with high inflation was over, cut its benchmark interest rate by 50 basis points to a range of 4.75% to 5.00%. “The logic of that from both an economic and risk management standpoint was clear.”

So obvious that Powell, who has championed a unanimous policy since becoming Fed chairman in 2018, saw his first dissent from a Fed governor since 2005 when Michelle Bowman voted against the move in favor of a smaller quarter-point rate cut. Some analysts saw that as evidence of his motivation to start the Fed’s easing cycle in a convincing way.

Powell called the move a “recalibration” to account for the sharp decline in inflation since last year; he noted that the economy remains strong but the central bank wants to get ahead of and prevent a weakening labor market; analysts saw it as a confirmation of his overarching goal of avoiding unnecessarily biasing higher unemployment toward meeting the central bank’s 2% inflation target.

“A soft landing is within reach and would seal his legacy as chairman of the Federal Reserve,” said Diane Swonk, chief economist at KPMG.

In addition to approving a half-percentage-point cut on Wednesday, Federal Reserve policymakers are forecasting the benchmark interest rate will fall another half-percentage point by the end of this year, a full percentage point next year and half a percentage point in 2026, though they caution that the outlook for that far into the future is necessarily uncertain.

The move marks a significant shift in U.S. monetary policy and a recognition of the Fed’s growing comfort that inflation is continuing to fall toward its target. It is now about half a percentage point higher.

Although the Fed’s decision came only about seven weeks before the U.S. presidential election, there was at least an initially restrained reaction from the presidential candidates.

Vice President Kamala Harris, the Democratic presidential candidate, called the interest rate cut “good news” for Americans.

“I know prices are still too high for many middle-class and working families,” she said in a statement.

Republican Party candidate Donald Trump, who as president first appointed Powell to head the Federal Reserve, said the size of the rate cut showed the economy could be in trouble.

“If you were to cut it that much, assuming they’re not just playing politics, the economy would be in very bad shape,” Trump told reporters.

However, Powell said the economy remains strong and many labor market indicators, such as jobless claims and even the current unemployment rate of 4.2%, are not at worrisome levels.

But he raised the same issues that economists and analysts have raised about inflation: that changes in monetary policy take time to bear fruit, and that officials, given anecdotal information from businesses and the slowdown in hiring, felt they needed to get ahead of further labor market weakness, just as others have argued for quick action to preempt inflation.

“There is a view that the time to support the labor market is when it is strong, not when layoffs start,” Powell said.

‘With a bang’

The Federal Reserve has kept interest rates in a range of 5.25% to 5.50% since July of last year, when it ended an 18-month campaign of rate hikes aimed at taming a surge in inflation that hit a 40-year high in 2022.

Powell declined to declare victory on that front, but said inflation was now approaching the Fed’s 2% target and that labor conditions were consistent with the central bank’s other goal of achieving maximum employment.

US stocks gained on the release of the statement and updated quarterly economic forecasts, before reversing course to close lower. The US dollar was slightly stronger against a basket of currencies, while US Treasury yields rose.

Interest rate futures traders are expecting even more monetary easing than the Federal Reserve had anticipated. The benchmark rate is currently expected to be around 4.00% to 4.25% by the end of the year.

“The Fed ended the break with a bang. It’s a strong signal that they cut rates by 50 basis points and they expect another 50 basis points of cuts this year. That was controversial,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Inflation, based on the Fed’s preferred measure, is now about half a percentage point above 2%, and new economic forecasts show the annual rate of growth in the consumer price index will fall to 2.3% by the end of this year and to 2.1% by the end of 2025. The unemployment rate is forecast to end this year at 4.4% and remain there through 2025. Economic growth is projected to be 2.1% through 2024 and 2% next year, the same as in the last round of forecasts released in June.