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The U.S. central bank has cut interest rates more deeply than usual for the first time in more than four years.
The Fed lowered its key lending rate target by 0.5 percentage point to a range of 4.75%-5%.
Bank President Jerome Powell said the move was “strong” but necessary as inflation eases and job market concerns grow.
That will come as a relief to U.S. borrowers who have endured the highest interest rates in more than 20 years.
Wednesday’s rate cut was larger than many analysts had expected just a week ago, with the central bank’s forecast suggesting rates could fall another half a percentage point by the end of the year.
Federal Reserve Chairman Jerome Powell said Wednesday’s aggressive measures are aimed at ensuring that high borrowing costs introduced to combat inflation do not ultimately have a negative impact on the U.S. economy. He said that he is doing so.
“The labor market is in good shape and we want to keep it that way,” Powell said. “That’s what we’re doing.”
The Fed’s move follows rate cuts by other central banks in Europe, the UK and Canada, which were widely expected.
But ahead of the meeting, there was unusual uncertainty about how much cuts officials would approve.
“Despite not seeing any significant economic problems, policymakers decided to be proactive,” said Isaac Stell, investment manager at Wealth Club, a British investment service.
“Many may wonder what will happen to prompt the Fed to take such bold action.”
The Fed has sharply raised interest rates starting in 2022 in an effort to cool the economy and stabilize prices, which at the time were rising at the fastest pace since the 1980s.
The move was aimed at easing price pressures by cutting spending, although it spilled over into the public in the form of more expensive mortgages, car loans and other debt.
But as inflation, the rate of price increases, subsides, officials are increasingly concerned about the risks high interest rates pose to the broader economy.
The U.S. unemployment rate rose to 4.2% from 3.7% at the beginning of the year as employment slowed.
Officials now expect inflation to fall faster than in June and unemployment to rise, with the unemployment rate expected to reach 4.4% by the end of 2024, according to forecasts released after the meeting. There is.
Powell said the job market was so hot last year that he welcomes some cooling, but he denied that the Fed was worried about the beginning of a deep economic slowdown.
“At this point, we are not seeing any phenomena that would suggest that there is an increased possibility that the economy will deteriorate,” he said.
The U.S. economy grew at an annual rate of 3% in the three months ending in June, according to the latest figures from the Commerce Department. Retail spending also remains resilient.
Meanwhile, inflation fell to 2.5% in August, moving closer to the Fed’s 2% target for the fifth straight month.
Federal Reserve Board Member Michelle Bowman voted against the move, the first time she has voted against it since 2005.
The bank has previously announced interest rate cuts of 0.5 percentage points during crises such as the outbreak of the coronavirus pandemic and the 2008 financial crisis.
But economist Randall Krosner, a professor at the University of Chicago Booth School of Business and a former Fed director, said Wednesday’s announcement was important not because of the size of the cut, but because it marked the beginning of a new period of lower borrowing costs. .
“One quarter of a percentage point is not going to destroy the American economy anyway,” he said.
“That’s exactly where they’re heading, not just for the rest of this year, but for the medium to long term.”
The Fed has kept the key interest rate it charges banks on borrowing unchanged since July 2023.
Officials expect the key lending rate to fall to about 4.4% by the end of the year and 3.4% by the end of 2025, according to forecasts released by the Fed. This is significantly lower than many expected in June.
“That’s a big deal.”
Restaurant owner Jennifer Heasley says her monthly payments have increased “hugely”.
Jennifer Heasley, owner of Sweet Mama’s Mambo Sauce in Pennsylvania, has been worried about the Fed’s actions ever since she used a credit card to pay for an expansion of her barbecue-style sauce business two years ago. He said he was waiting.
“Interest rates have gone up, so my monthly payments have increased significantly,” she said, noting that one card now charges a 21% fee.
“If you buy a $1,500 piece of equipment and put it on a credit card, if you don’t pay it back, you’re going to end up accruing a lot of interest,” she says.
“For me, it’s a big deal if they start to decline.”
The Dow Jones Industrial Average, S&P 500, and Nasdaq soared after the initial announcement, but ended the day slightly lower.
Additional reporting by Michel Fleury
