Fed Unveils Significant Rate Cut as Confidence in Inflation Grows, Reports Reuters

By Howard Schneider and Ann Saphir

WASHINGTON – The U.S. central bank initiated a highly anticipated series of interest rate cuts on Wednesday with a substantial half-percentage-point reduction. Federal Reserve Chair Jerome Powell emphasized that this move showcases the policymakers’ commitment to maintaining a low unemployment rate amidst the easing of inflation.

"We made a good strong start and I am very pleased that we did," Powell remarked during a press conference following the decision. He noted the Fed’s heightened confidence that the country’s struggle with elevated inflation is coming to an end, as the benchmark policy rate was lowered by 50 basis points to a range of 4.75%-5.00%. "The logic of this both from an economic standpoint and from a risk management standpoint was clear."

So clear, in fact, that Powell faced his first dissent from a Fed governor since 2005. Michelle Bowman voted against the decision, advocating for a smaller quarter-percentage-point cut, suggesting some analysts view this as a reflection of Powell’s desire to assertively commence the easing cycle.

Powell characterized the decision as a "recalibration" in response to the significant drop in inflation since last year, while stressing the economy remains strong. The Fed aims to get ahead of any potential weakening in the job market. Analysts interpreted this as reflecting Powell’s overarching goal to avoid unnecessarily increasing unemployment to achieve the central bank’s 2% inflation target.

"A soft landing is within reach, which would seal his legacy as Fed Chairman," stated Diane Swonk, the chief economist at KPMG.

In addition to the 50 basis-point cut, Fed officials projected that the benchmark interest rate would fall by another half-point by the end of this year, with a total decrease of one percentage point expected next year, and an additional half-point in 2026. However, they cautioned that forecasts far into the future carry inherent uncertainties.

This decision marks a significant shift in U.S. monetary policy, highlighting the Fed’s growing confidence in the ongoing decline of inflation, which is currently about half a percentage point above the target.

Despite the timing, just seven weeks before the U.S. presidential election, the Fed’s decision generated a relatively subdued reaction from the candidates. Vice President Kamala Harris, representing the Democratic side, called the rate cut "welcome news" for the American public. "I know prices are still too high for many middle-class and working families," she stated.

In contrast, Republican nominee Donald Trump, who appointed Powell to lead the Fed during his presidency, suggested that the magnitude of the cut indicated economic troubles. "To cut it by that much, assuming they’re not just playing politics, the economy would be very bad," he remarked to reporters.

Powell countered these concerns by stating that the economy continues to show strength, with various job market indicators, such as unemployment claims and the current 4.2% unemployment rate, remaining stable.

Nonetheless, he acknowledged the challenges posed by inflation, noting that changes in monetary policy take time to manifest effects, and that the Fed felt it necessary to anticipate further labor market weakness, similar to how others have advocated for swift actions to combat inflation. "There is thinking that the time to support the labor market is when it is strong, and not when you begin to see layoffs," Powell explained.

The Fed had upheld its policy rate in the 5.25%-5.50% range since July, ending an 18-month rate-hike campaign aimed at controlling an inflation surge that peaked to a 40-year high in 2022. While Powell refrained from declaring victory over inflation, he did acknowledge that it is now nearing the Fed’s 2% goal, aligning labor conditions with the central bank’s objective of maximum employment.

Following the announcement and revised quarterly economic projections, U.S. stock markets experienced initial gains before ultimately closing lower. The U.S. dollar strengthened slightly against a basket of currencies, and U.S. Treasury yields increased.

Rate futures traders adjusted their expectations, pricing in greater easing than projected by the Fed, with the policy rate anticipated to fall to the 4.00%-4.25% range by the end of the year.

"The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 basis points and expect another 50 basis points of cuts this year. This was controversial," remarked Brian Jacobsen, chief economist at Annex Wealth Management.

According to the Fed’s preferred inflation measures, it is currently about half a percentage point over the 2% target. New economic projections indicate that the annual rate of increase in the personal consumption expenditures price index is expected to decline to 2.3% by the end of this year and further to 2.1% by the end of 2025. They foresee the unemployment rate remaining stable at 4.4% through 2025, with economic growth projected at 2.1% through 2024 and 2% the following year.