Washington — The US Federal Reserve cut interest rates by half of a percentage point on Wednesday, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs that followed growing unease about the health of the job market.
“The committee has gained greater confidence that inflation is moving sustainably towards 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the US central bank’s rate-setting committee said in their latest statement, which drew dissent from governor Michelle Bowman who favoured only a quarter-percentage-point cut.
Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of the year, another full percentage point in 2025, and by a final half a percentage point in 2026 to end in a 2.75%-3% range.
The endpoint reflects a slight upgrade, from 2.8% to 2.9%, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.
Even though inflation “remains somewhat elevated”, the Fed statement said policymakers chose to cut the overnight rate to the 4.75%-5% range “in light of the progress on inflation and the balance of risks”.
The Fed “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals”, with attention to “both sides of its dual mandate” for stable prices and maximum employment.
“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%,” Fed chair Jerome Powell said after the meeting.
With risks to both mandates now “roughly balanced”, Powell said, the rate cut marked a “strong start” to protecting strength in the economy and the labour market, and should be seen as a commitment to not falling behind the curve.
The Fed’s policy meeting this week was its last before voters go to the polls in what is expected to be a close US presidential election on November 5.
The size of the initial cut is likely to raise questions about the Fed’s strategy, and whether policymakers were merely trying to account for the fast decline in inflation since last year, 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 Fed’s 2% target.
It is about half a percentage point above that, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3% by the end of the year and down to 2.1% by the end of 2025.
The unemployment rate is seen ending this year at 4.4%, higher than the 4.2% it is now, and remaining there until next year. Economic growth is seen at 2.1% for 2024 and 2% next year, the same as in the last round of projections issued in June.
The Fed had held its policy rate in the 5.25%-5.50% range since July 2023 as inflation fell from a 40-year high to a level that is now approaching the central bank’s target.
Powell declined to declare victory on that score, but he did say inflation is now near the Fed’s 2% goal, and labour conditions, including an unemployment rate of 4.2%, are consistent with the central bank’s other goal of maximum employment.
Update: September 18 2024
This story has been updated with Jerome Powell’s comments.
Reuters
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