Bloomberg: Federal Reserve Enters Easing Cycle with Half-Point Rate Cut

Bloomberg Highlights Historic Rate Adjustment

The Federal Reserve cut its benchmark interest rate by half a percentage point on Wednesday and signalled more reductions would follow, launching its first easing cycle since the onset of the pandemic.

The US central bank’s first cut in more than four years leaves the federal funds rate at a range of 4.75 per cent to 5 per cent. Michelle Bowman, a member of the Federal Open Market Committee, voted against the decision, favouring a quarter-point reduction — the first Fed governor since 2005 to dissent from a rate decision.

The half-point cut is larger than the Fed’s more customary quarter-point pace and suggests the US central bank is concerned about the prospects of a weakening economy after more than a year of holding rates at a 23-year high.

Market Reactions and Future Projections

The last time the Fed cut rates by more than a quarter point was when Covid-19 tore across the global economy in 2020.

• In a policy statement on Wednesday, the FOMC said it had gained greater confidence about inflation, even though it remained somewhat elevated.
• The S&P 500 jumped as much as 0.9 per cent shortly after the announcement.
• Policymakers noted the risks to achieving their price stability goal while also maintaining a healthy labour market were roughly in balance.

Central Bank's Focus on Inflation and Labor Market

Wednesday’s decision is a milestone for the central bank after more than two years battling inflation — and a significant moment in this year’s presidential election.

Falling borrowing costs will be a boon for Democratic candidate Kamala Harris, whose campaign has been dogged by voter disquiet over high living costs even as the US economy has boomed.

The Fed has made clear it does not want to see further labour market weakening amid concerns it has waited too long to loosen its grip on the economy by lowering borrowing costs.

In projections released on Wednesday, most officials forecast the unemployment rate to peak at 4.4 per cent over the next two years, up from its current level of 4.2 per cent.