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WASHINGTON – The Federal Reserve on Wednesday lowered its benchmark interest rate by a significant half-percentage point, the first reduction since the early days of the Covid pandemic. This move aims to prevent a potential slowdown in the labor market.
With both employment and inflation showing signs of easing, the central bank's Federal Open Market Committee (FOMC) opted for a more aggressive rate cut than initially anticipated. This marks the largest rate reduction since the 2008 financial crisis, outside of the emergency measures taken during the pandemic.
The decision brings the federal funds rate down to a range of 4.75% to 5%. This reduction will likely affect consumer borrowing costs, including mortgages, auto loans, and credit cards.
In addition to the immediate rate cut, the FOMC signaled its intention to continue easing monetary policy. Its "dot plot" indicates an expectation for another half-point reduction by the end of the year. Looking further ahead, the committee anticipates a total reduction of around 2 percentage points in the benchmark rate over the next two years.
The Fed expressed increased confidence that inflation is on a sustainable path toward its 2% target. It also assessed that the risks to achieving its employment and inflation goals are currently balanced.
The Federal Reserve's decision to ease monetary policy was driven by progress in inflation and a balanced assessment of economic risks. The FOMC vote was unanimous, with only Governor Michelle Bowman dissenting in favor of a smaller rate cut. Investors eagerly await Chair Jerome Powell's press conference at 2:30 p.m. ET for further insights. Following the announcement, market volatility was evident, with the Dow Jones Industrial Average initially surging by as much as 375 points before moderating. Investors were assessing the implications of the rate cut for the economy. The committee evaluated the economic landscape, noting a slowdown in job gains and a slight increase in the unemployment rate, which remains low. The FOMC raised its forecast for the unemployment rate to 4.4% and lowered its inflation outlook to 2.3%. Core inflation projections were also reduced to 2.6%. The committee anticipates the long-run neutral interest rate to be around 2.9%, reflecting the challenges in achieving its 2% inflation target. Despite a generally positive economic outlook, with steady GDP growth and strong consumer spending, the Fed decided to cut rates. This move occurred even though inflation remains above the central bank's target. The Fed's preferred inflation measure is currently around 2.5%, below its peak but still higher than desired. Recent concerns expressed by Powell and other policymakers regarding the labor market influenced the decision. While layoffs have been minimal, hiring has slowed significantly. The current hiring rate is at its lowest level since the unemployment rate was above 6%. In his previous press conference, Powell indicated that a 50 basis point rate cut was not under consideration at that time. The Fed's latest move helps resolve a debate about the appropriate level of initial monetary easing.
## **Federal Funds Rate Increases Since 2022**
**Note:** The Federal Reserve has made several adjustments to the federal funds rate since 2022 in response to economic conditions, particularly to combat inflation. The following table summarizes the key increases:
| Date | Increase (Basis Points) | Total Increase (Basis Points) |
|---|---|---|
| March 16, 2022 | 25 | 25 |
| May 4, 2022 | 50 | 75 |
| June 15, 2022 | 75 | 150 |
| July 27, 2022 | 75 | 225 |
| September 21, 2022 | 75 | 300 |
| November 2, 2022 | 75 | 375 |
| December 14, 2022 | 50 | 425 |
| January 31, 2023 | 25 | 450 |
| February 1, 2023 | 25 | 475 |
| March 22, 2023 | 25 | 500 |
| May 3, 2023 | 25 | 525 |
The decision to cut interest rates raises questions about the extent to which the Federal Reserve should continue easing monetary policy. There was significant disagreement among FOMC members regarding future rate projections.
Investor sentiment toward a rate cut fluctuated in the days leading up to the meeting. In the week prior to the announcement, odds favored a half-point reduction, reaching 63% according to the CME Group's FedWatch gauge.
The Fed's last rate cut occurred on March 16, 2020, as an emergency response to the economic shutdown caused by the Covid-19 pandemic. Subsequently, the Fed embarked on a rate-hiking cycle beginning in March 2022 to address soaring inflation. The most recent rate hike took place in July 2023. During this period, the Fed aggressively raised rates by 75 basis points four times.
The current unemployment rate stands at 4.2%, having risen slightly over the past year but remaining at a full-employment level.
Given its central role in the global financial system, the Fed's decision is likely to influence other central banks, many of which have already begun cutting rates. The primary factors driving global inflation were pandemic-related, including disrupted supply chains, increased demand for goods, and substantial monetary and fiscal stimulus.
The Bank of England, European Central Bank, and Bank of Canada have recently reduced rates, while others may follow the Fed's lead.
Although the Fed approved the rate hike, it maintained its quantitative tightening program, gradually reducing its bond holdings. The Fed's balance sheet has decreased by approximately $1.7 trillion from its peak, reaching $7.2 trillion. The monthly reduction in maturing Treasuries and mortgage-backed securities has been lowered from $95 billion to $50 billion.
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