USA goes on the offensive with first interest rate cut in four years

The US Federal Reserve has cut its key interest rate for the first time in more than four years, and by a much greater amount than usual.

The Federal Reserve reduced raise the target for the key interest rate by 0.5 percentage points to a range of 4.75%-5%.

Jerome Powell, the bank's head, called the move “strong” but said it was necessary as price increases eased and labor market concerns increased.

This will come as a relief to borrowers in the US, who are struggling with the highest interest rates in more than two decades.

Wednesday's cut was larger than many analysts had predicted a week ago, and the bank's forecast suggested rates could fall by another half a percentage point by the end of the year.

Federal Reserve Chairman Jerome Powell said Wednesday's aggressive action was intended to ensure that high borrowing costs introduced to combat inflation would not ultimately harm the U.S. economy.

“The labor market is in a strong position – we want to keep it there,” Powell said. “That's what we're doing.”

The Fed's move followed interest rate cuts by other central banks, including in Europe, the UK and Canada, and a cut had been widely expected.

But ahead of the meeting there was unusual uncertainty about how big the cuts officials would approve.

“Although there are currently no significant economic problems in sight, policy makers have decided to get ahead of developments,” said Isaac Stell, investment manager at British investment service Wealth Club.

“Many may wonder what the Fed sees on the horizon to prompt such a bold move.”

Starting in 2022, the Fed raised interest rates sharply with the aim of cooling the economy and stabilizing prices, which were rising at a rate not seen since the 1980s.

These measures, which impacted the population in the form of higher mortgage prices, auto loans and other debts, were intended to ease price pressures through spending cuts.

But as inflation, the rate at which prices rise, subsides, policymakers are increasingly concerned about the risks that high interest rates pose to the wider economy.

The unemployment rate in the US has risen from 3.7% at the beginning of the year to 4.2% as recruitment numbers declined.

Forecasts released after the meeting show that officials now expect inflation to fall faster and unemployment to rise more sharply than in June, with the unemployment rate likely to reach 4.4 percent by the end of 2024.

Powell said the labor market was too hot last year and he welcomed some cooling, but he denied that the Fed was worried about the start of a serious economic slowdown.

“I don't see anything in the economy right now that suggests there is an increased likelihood of a downturn,” he said.

In the three months to June, the US economy grew by 3 percent annually, according to the latest figures from the US Department of Commerce. Retail sales also remained stable.

Inflation, meanwhile, fell to 2.5% in August, approaching the Fed's 2% target for the fifth month in a row.

One of the Fed governors, Michelle Bowman, voted against the move. It was the first such dissenting vote since 2005.

In the past, the bank has announced interest rate cuts of 0.5 percentage points in times of crisis, such as the outbreak of the coronavirus pandemic or the financial crash in 2008.

But economist Randall Kroszner, a professor at the University of Chicago's Booth School of Business and a former Fed governor, said Wednesday's announcement was significant not because of the size of the rate cut but because it will usher in a new period of lower borrowing costs.

“A quarter of a percentage point in one direction or the other – that will not ruin the U.S. economy,” he said.

“That's really the direction they're heading both for the rest of the year and in the medium and long term.”

The Fed had left its key interest rate, which it charges banks for loans, unchanged since July 2023.

The forecasts published by the Fed show that central bankers expect the key interest rate to fall to around 4.4 percent by the end of the year and to 3.4 percent by the end of 2025. This is significantly less than many had predicted in June.

Jennifer Heasley, the owner of Sweet Mama's Mambo Sauce in Pennsylvania, said she was waiting impatiently for the Fed to intervene after using credit cards to finance the expansion of her barbecue sauce-making business two years ago.

“My interest rates have gone up, so my monthly payments have increased tremendously,” she said, noting that she now has to pay 21 percent on one of her cards.

“If you buy a $1,500 appliance and pay the bill with a credit card, you're going to incur pretty high interest rates if you don't pay it off,” she said.

“For me, it's a big deal that they're starting to come down.”

The Dow Jones Industrial Average, S&P 500 and Nasdaq jumped after the initial announcement but ended the day slightly lower.

Additional reporting by Michelle Fleury