U.S. central bank begins easing cycle, lowering Federal Reserve interest rates to a range of 4.75% to 5.00%.Policymakers expect another 50 basis point rate cut in 2024. Fed President David Bowman opposes the move. WASHINGTON, Sept 18 (Reuters) – The U.S. central bank began an expected series of rate cuts on Wednesday with a steeper 0.5 percentage point cut than usual, a move it did not intend to signal to policy makers. said Federal Reserve Chairman Jerome Powell. A commitment to maintaining low unemployment now that inflation has eased.
“We’re off to a strong start, and I’m very happy with that,” Powell said at a news conference after the Fed cut interest rates by 50 basis points, increasing confidence that the country’s high inflation problem is over. “I am doing so,” he said. In the range of 4.75% to 5.00%. “The logic was clear both from an economic perspective and from a risk management perspective.”
Mr. Powell, who has supported consensus policy since becoming Fed chair in 2018, has been at the Fed since 2005, when Michelle Bowman voted against the decision in favor of cutting interest rates by a quarter of a percentage point. It is a very clear fact that this was the first time a board member had expressed an opposing opinion. The cut – evidence that some analysts have described in a convincing way about his motivation to start the Fed’s easing cycle.
Chairman Powell called the move a “recalibration” to take into account the sharp decline in inflation since last year. He noted that while the economy remains strong, the central bank wants to stay ahead of the curve and prevent a downturn in the job market. Analysts see him agreeing with his overarching goal of avoiding unnecessarily trading higher unemployment rates to meet the central bank’s 2% inflation target.
“A soft landing is within reach and would cement his accomplishments as Fed chair,” said Diane Swonk, chief economist at KPMG.
In addition to approving a 0.5 percentage point cut on Wednesday, Fed policymakers expected the benchmark interest rate to fall another 0.5 percentage point by the end of this year and a full 0.5 percentage point next year. However, they cautioned that prospects for that distant future were necessarily uncertain.
The move marks an important turning point in U.S. monetary policy and recognizes the Fed’s increasing comfort that inflation continues to ease toward its target. It currently exceeds that by about 0.5 percentage points.
The line chart titled “U.S. Federal Funds Target Rate” tracks the indicator over time. Interest rates were lowered by 0.50 percentage points in September. Although the U.S. presidential election is only about seven weeks away, the Fed’s policy decisions, at least initially, prompted a fairly muted reaction from presidential candidates. Democratic presidential candidate Kamala Harris called the rate cut “welcome news” for Americans.
“We know that prices remain too high for many middle-class and working families,” she said in a statement.
Republican candidate Donald Trump, who became the first president to appoint Powell as Fed chair, said the scale of the rate cuts suggested the economy may be in trouble.
Item 1 of 2 Exterior view of the Mariner S. Eccles Federal Reserve Board Building, seen on June 14, 2022, in Washington, DC, USA. REUTERS/Sarah Silbiger/File photo
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“Assuming they’re not just playing politics, if you cut that much, the economy will be in very bad shape,” Trump told reporters.
However, Powell said the economy remains strong, with many job market indicators such as unemployment insurance claims and even the current 4.2% unemployment rate not at levels of concern.
But he echoed the same questions economists and analysts are raising about inflation. So between monetary policy changes taking time to have an impact and anecdotal evidence from businesses and declining employment rates, officials feel they need to pre-empt further labor market downturns. That’s true. Just as others are arguing for swift action to prevent inflation.
“The idea is that the time to support the labor market is when the labor market is strong, not when you start to see layoffs,” Powell said.
A line chart comparing key inflation indicators over the past five years.
“With a Bang”
The Fed has kept interest rates in the range of 5.25% to 5.50% since last July, when it ended an 18-month rate hike campaign aimed at curbing a surge in inflation that rose to a 40-year high in 2022. has been maintained. .
Powell declined to declare victory on this point, but said inflation is now near the Fed’s 2% target and working conditions are consistent with another Fed goal of maximum employment. .
U.S. stocks rose after the statement and update on the quarterly economic outlook, but reversed and ended the day lower. The U.S. dollar (.DXY) opens in a new tab rose slightly against a basket of currencies, and U.S. Treasury yields rose.
Interest rate futures traders are starting to price in more easing than expected by the Fed, with rates expected to be in the 4.00-4.25% range by the end of this year.
“The Fed ended its pause with a bang,” said Brian Jacobsen, chief economist at Annex Wealth Management. “It’s a strong signal that there is. This was controversial.” Based on the Fed’s recommended metrics, it is currently about 0.5 percentage point above the 2% level, and new economic forecasts show annual growth in the personal consumption expenditures price index falling to 2.3% by the end of this year. has been done. By the end of 2025, it will fall to 2.1%. The unemployment rate is expected to end this year at 4.4% and remain there until 2025. The economic growth rate is expected to be 2.1% until 2024, and 2% next year, the same as last year. Scatterplot titled “FRB Dot Plot”. Interest rate forecasts by Federal Open Market Committee officials
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Report by Howard Schneider. Additional reporting by Lindsay Dunsmuir, Chuck Mikolajczak, Michael S. Derby, and Bo Erickson. Editing: Paul Simao
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