For months now, as inflation dropped closer to the Federal Reserves 2% target, economists have been expecting a cut to the Fed’s key interest rate in September.
Turns out they were right.
The Fed lowered the interest rate by a full half-point Wednesday, the first rate cut in more than four years.
With the labor market slowing, Fed officials opted for a bold approach to launch a projected flurry of rate cuts now that inflation is easing, USA Today reported Wednesday.
While many economists had expected a series of cuts the rest of the year, the Fed in announcing this one also signaled further cuts this year would likely only total another half-point.
“The (Fed) 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,” the Fed said in a statement after a two-day meeting. “The economic outlook is uncertain, and the Fed is attentive to the risks of both sides of its dual mandate.”
In the statement, Fed officials also said “inflation has made further progress toward (their) 2% goal.” Previously, they said “there has been some further progress” toward that target.
Fed Governor Michelle Bowman was the lone dissenter, preferring a quarter point cut, according to the USA Today report.
The decision lowers its benchmark short-term rate to a range of 4.75% to 5% from a 23-year high of 5.25% to 5.5% after a series of 11 increases since May 2022.
The move is expected to provide the relief in years to Americans who have struggled with high borrowing costs for mortgages, credit cards, and auto and other loans.
Yet it also will trim bank savings account yields that finally have provided significant returns.
Beside forecasting a dip in the federal funds rate to a range of 4.75% to 5% by year’s end, Fed policymakers also suggested there would be four quarter-point cuts next year and two more in 2026. That roadmap would reduce the key rate to about 2.9% by the end of 2026.
Before the decision, futures markets correctly predicted the Fed would approve a half-point cut Wednesday. But they forecast a total 1.25 percentage points in reductions this year and officials’ median estimate fell a quarter point shy of that, the USA Today report said.
The economy grew at a 3% annual rate in the second quarter, giving the Fed another reason to whittle down rates at a measured pace.
In recent months, Fed policymakers have said they were drawing closer to reducing the fed funds rate now that risks to their mandates of stable prices and maximum employment have become more balanced. Some forecasters have said the rate already should be at a “neutral” level of less than 4% – which theoretically would neither spur nor slow the economy – and the Fed was behind the curve.
The Fed lifts rates to curb borrowing and economic activity to bring down inflation. It lowers rates to stimulate the economy and stave off, or propel the nation from, recession.
