US Fed makes big interest rate cut and forecasts more to come

WASHINGTON – The US Federal Reserve cut interest rates by half of a percentage point on Sept 18 in its first reduction for more than four years, sharply lowering borrowing costs shortly before November’s US presidential election.

“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 per cent,” Fed chairman Jerome Powell said at a press conference following the meeting.

The pivot comes in response to months of fading inflation, and it is meant to prevent the economy from slowing so much that the job market begins to weaken more painfully.

Officials have been keeping a careful eye on a recent uptick in the unemployment rate, and by starting off with a big cut, the Fed is in effect taking out insurance against a bigger employment slowdown.

Reinforcing that cautious message, the decisive reduction came alongside economic projections that suggested a swifter pace of rate cuts than officials had envisioned just a few months ago.

The Fed now sees its benchmark rate falling by another half of a percentage point by the end of 2024, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75 per cent to 3 per per cent range.

Major US stock indices moved in and out of positive territory after the Fed decision, with the Dow Jones Industrial Average finishing down 0.3 per cent.

The Fed’s decision will be met “with both elation and criticism”, said Briefing.com. “The larger rate cut should placate participants who think the Fed is behind the curve already in trying to forestall a hard landing.”

“Conversely, it will elicit criticism from participants who think the larger rate cut wasn’t warranted given broader economic trends,” the market analysis firm said.

“The worry will be that the more aggressive rate cut risks igniting inflation again.”

Even though inflation “remains somewhat elevated”, the Fed’s latest statement said policymakers chose to cut the overnight rate to the 4.75 per cent to 5 per cent range “in light of the progress on inflation and the balance of risks”.

The US central bank “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the (Federal Open Market Committee’s) goals”, with attention to “both sides of its dual mandate” for stable prices and maximum employment, it said.

The Fed’s policy meeting this week was its last before US voters go to the polls in what is expected to be a close US presidential election on Nov 5.

Following the release of the statement and projections, investors in contracts tied to the Fed’s policy rate put about a 64 per cent probability on a quarter percentage point cut at the US central bank’s next two-day policy meeting, which begins a day after the US election.

Labour market slowdown

The size of the initial cut will likely raise questions about the Fed’s strategy, and whether policymakers were merely trying to account for the fast decline in inflation since 2023, or address concerns among some officials that the US job market may be weakening faster than desired or needed to ensure inflation fully returns to the US central bank’s 2 per cent target.

It is currently about half a percentage point above that level, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3 per cent by the end of 2024 and down to 2.1 per cent by the end of 2025.

The unemployment rate is seen ending 2024 at 4.4 per cent, higher than the current 4.2 per cent, and remaining there until 2025. Economic growth is seen at 2.1 per cent over the year of 2024 and 2 per cent in 2025, the same as in the last round of projections issued in June.

The Fed had held its policy rate in the 5.25 per cent to 5.5 per cent range since July of 2023 as inflation fell from a 40-year high to a level now approaching the US central bank’s target. REUTERS, NYTIMES, AFP