In a significant move, the US Federal Reserve announced on Wednesday a half-percentage-point cut to its key lending rate, marking its first reduction in over four years. This decision aims to lower borrowing costs just before the upcoming presidential election, impacting interest rates on a variety of loans, including mortgages and credit cards.
A Shift in Monetary Policy
The Fed’s decision reflects a strategic pivot from its previous high interest rate policy, which was intended to control inflation. With inflation easing towards the central bank’s long-term target of 2% and signs of a cooling labor market, this rate cut could be advantageous for Democratic presidential candidate Kamala Harris, who is vying against former Republican President Donald Trump.
“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” Harris stated.
Political Implications
Trump, addressing reporters in New York, suggested that the Fed’s decision could indicate either a struggling economy or a politically motivated maneuver. “But it was a big cut,” he noted, acknowledging the significance of the move.
Following the Fed’s announcement, major US stock indices closed lower. Policymakers voted 11-to-1 to reduce the benchmark rate to a range of 4.75% to 5.00%. They also hinted at the possibility of another half-point cut before the year ends and an additional full-point reduction in 2025.
Fed Chair’s Remarks
“It is time to recalibrate our policy to something that is more appropriate, given the progress on inflation and the labor market moving to a more sustainable level,” Fed Chair Jerome Powell remarked. He emphasized that this is just the beginning of a broader adjustment.
While analysts largely anticipated a rate cut, they were divided on whether it would be a 25 or 50 basis point reduction. The larger cut is seen as a move to stimulate demand but comes with risks of reigniting inflation. Former Boston Fed President Eric Rosengren expressed some surprise at the magnitude of the cut but noted that Powell effectively communicated the rationale behind it.
Future Projections
Updated forecasts from the Fed indicate an expected unemployment rate of 4.4% in the fourth quarter, a slight increase from the previous estimate of 4.0%. The Fed also projected an annual inflation rate of 2.3%, marginally lower than previous predictions. Futures traders are estimating a 65% likelihood of at least another 75 basis points in cuts within this year.
While the Fed operates under a dual mandate to address both inflation and employment, its latest decision carries potential political consequences, especially as inflation remains a pivotal issue for voters ahead of the election.
Trump has repeatedly criticized Powell, advocating for greater presidential influence over the Fed’s decisions. In response, Powell reiterated the importance of the Fed’s independence, stating, “We’re not serving any politician, any political figure, any cause, any issue, nothing.”
