Fed cuts interest rates in September 2024:

WASHINGTON – The U.S. Federal Reserve on Wednesday decided on its first interest rate cut since the beginning of the Covid pandemic, lowering the key interest rate by half a percentage point to prevent a slowdown in the labor market.

In view of the declining employment situation and falling inflation, the Federal Open Market Committee of the Federal Reserve decided to cut the key overnight interest rate by half a percentage point or 50 basis points. This confirmed market expectations, which had recently deviated from a reduction of half as much.

Apart from the emergency interest rate cuts during the Covid pandemic, the last time the FOMC cut interest rates was by half a percentage point was in 2008 during the global financial crisis.

The decision lowers the benchmark interest rate to a range between 4.75% and 5%. The rate sets the short-term borrowing costs for banks, but also affects numerous consumer products such as mortgages, car loans and credit cards.

In addition to that cut, the committee's “dot chart” suggested that the benchmark interest rate would be cut another 50 basis points by year-end, close to market rates. The matrix of individual officials' expectations suggested another full percentage point cut by the end of 2025 and half a percentage point in 2026. Overall, the dot chart shows that the benchmark interest rate will fall by about 2 percentage points beyond Wednesday's move.

“The Committee has become more confident that inflation is moving sustainably towards 2 percent and believes that the risks to achieving its employment and inflation objectives are broadly balanced,” the statement said after the meeting.

The decision to ease was made “in light of progress on inflation and the balance of risks.” The FOMC vote ended 11-1, with Governor Michelle Bowman favoring a quarter-percentage point of easing.

In assessing the economic situation, the committee concluded that “employment gains have slowed and the unemployment rate, while rising, remains low.” FOMC officials raised their expected unemployment rate this year to 4.4% from 4% at the last update in June and lowered the inflation forecast to 2.3% from 2.6%. Core inflation was cut by the committee to 2.6%, a 0.2 percentage point decrease from June.

The committee expects the neutral interest rate to be around 2.9% over the long term, a figure that has risen because the Fed has tried to reduce inflation to 2%.

The decision comes despite most economic indicators looking relatively solid.

Gross domestic product has been rising steadily, and the Atlanta Fed expects third-quarter growth of 3%, driven by continued strong consumer spending. In addition, the Fed has decided to cut interest rates even though most indicators show inflation well above the central bank's 2% target. The Fed's preferred figure shows inflation at around 2.5%, well below its peak but still higher than policymakers would like.

However, Fed Chairman Jerome Powell and other policymakers have expressed concern about the labor market in recent days. While there are few signs of a recovery in layoffs, the rate of hiring has slowed significantly. In fact, the last time monthly hiring was this low – 3.5% as a share of the labor force – the unemployment rate was above 6%.

At his press conference following the July meeting, Powell noted that a 50 basis point cut was “not something we are currently considering.”

At least for now, the move helps end a controversial debate about how forceful the Fed should have been in its first move.

However, the question is now being raised as to how far the central bank should go before stopping its interest rate cuts. Members differ widely in their assessments of interest rate developments in the coming years.

Investors' conviction about the rate cut fluctuated in the days leading up to the meeting. Last week, the odds of a cut had risen by half a percentage point, reaching 63 percent for 50 basis points shortly before the decision, according to the CME Group's FedWatch indicator.

The Fed last cut interest rates on March 16, 2020, as an emergency response to the economic shutdown caused by the spread of Covid-19. It began raising rates in March 2022, when inflation rose to its highest level in more than 40 years, and last raised rates in July 2023. During the rate hike campaign, the Fed raised rates by 75 basis points four times in a row.

The current unemployment rate is 4.2%. Although it has increased over the past year, it is still at a level that would be considered full employment.

With the Fed at the center of the global financial universe, Wednesday's decision is likely to reverberate among other central banks, some of which have already begun cutting interest rates. The factors that drove up global inflation were largely due to the pandemic – crippled international supply chains, outsized demand for goods relative to services, and an unprecedented flood of monetary and fiscal stimulus.

The Bank of England, the European Central Bank and the Reserve Bank of Canada have all recently cut interest rates, but others were waiting for the Fed's cue.

While the Fed approved the rate hike, it left in place a program to slowly reduce its bond holdings. The process, known as quantitative tightening, has reduced the Fed's balance sheet to $7.2 trillion, a reduction of about $1.7 trillion from its peak. The Fed allows monthly redemptions of up to $50 billion worth of maturing Treasury and mortgage-backed securities. At the start of quantitative tightening, the amount was $95 billion.