Federal Reserve cuts rates by half a percentage point, signals start of easing era

The Federal Reserve cut its benchmark interest rate by half a percentage point on Wednesday and signaled more cuts would follow, launching its first round of easing since the start of the pandemic.

The U.S. central bank’s first rate cut in more than four years leaves the federal funds rate in a range of 4.75 to 5 percent. Federal Open Market Committee member Michelle Bowman voted in favor of a quarter-point cut, the first time since 2005 that a Fed governor has opposed a rate decision.

The half-point cut suggests the U.S. central bank is looking to preempt any weakening in the U.S. economy and labor market after keeping rates at their highest level since 2001 for more than a year.

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

“The U.S. economy is in good shape, and our decision today is designed to keep it that way,” Fed Chairman Jay Powell said at a news conference Wednesday. “This adjustment to our monetary policy will help maintain the strength of the economy and labor market and will continue to allow for further progress on inflation as we begin the process of transitioning to a more neutral stance.”

Powell said interest rates were not on a “predefined” path, noting that if inflation proved persistent, the Fed could “reduce restraint more slowly.” Likewise, the central bank was “ready to respond” if the labor market weakened unexpectedly, he added.

“We don’t think we’re behind (in cutting rates),” Powell said. “But you can take this as a sign of our commitment not to fall behind.”

In a statement released Wednesday, the FOMC said it had gained “greater confidence” about inflation, although it remains “somewhat elevated.”

U.S. stocks rebounded immediately after the announcement and peaked shortly after Powell’s press conference began. The S&P 500, which had been flat earlier in the day, jumped as much as 1.1%, briefly surpassing its intraday record, but closed slightly lower on the day.

The Treasury yield curve has steepened, with the spread between 10-year and two-year notes, a gauge of future growth expectations, reaching levels last seen in June 2022.

The yield on two-year bonds, which are sensitive to monetary policy, fell 0.06 percentage points to 3.59% after the Fed’s announcement, but then recovered to 3.63%. Bond yields move inversely to prices.

Asian markets rebounded Thursday morning. Mainland China’s CSI 300 stock index rose 0.8%, Hong Kong’s Hang Seng index gained 1.8% and Japan’s Topix gained 2.4%.

The yen weakened to ¥143.2 against the dollar after strengthening above ¥140 earlier in the week, as traders anticipated the Bank of Japan would not raise rates at a policy meeting ending Friday.

In the latest “dot chart” of policymakers’ forecasts, most expected the policy rate to fall to 4.25% to 4.5% by the end of 2024, suggesting another significant half-point cut at one of the two remaining meetings this year or two quarter-point cuts. Overall, that’s a significantly larger cut than the quarter-point cut most policymakers projected in June, when the dot chart was last updated.

Two of the 19 officials who wrote their estimates say the Fed should wait until after Wednesday’s cut, while seven others expect only one additional quarter-point cut this year.

Policymakers also expected the funds rate to fall another percentage point in 2025, ending the year between 3.25% and 3.5%. By the end of 2026, it is expected to fall just below 3%.

Some analysts said the Fed’s decision highlighted underlying concerns about the economy.

“The picture is very fuzzy,” said Jack Manley, global strategist at JPMorgan Asset Management. “The macro data is not as clear as we would like. The Fed is looking at the economy and saying, ‘We’re making more progress than expected on inflation, but we think the labor market is starting to get out of control and things could get worse.’ That’s not a good sign to me.”

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

Lower borrowing costs will be a boon to Democratic candidate Kamala Harris, whose campaign has been hampered by voter concern over the high cost of living even as the U.S. economy booms.

President Joe Biden welcomed the Fed’s decision, saying in a message on X: “We have reached an important moment: inflation and interest rates are falling while the economy remains strong. Critics have said this can’t happen, but our policies are reducing costs and creating jobs.”

The cut comes as Fed officials are increasingly confident that inflation is under control and are now focusing on the health of the labor market.

After peaking at around 7% in 2022, the personal consumption expenditures price index was just 2.5% in July, closer to the Fed’s 2% target.

But job growth has slowed in recent months and other measures of demand, such as job vacancies, have also slowed, even as the number of Americans filing for unemployment benefits remains historically low.

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

In projections released Wednesday, most officials expect the unemployment rate to peak at 4.4% over the next two years, up from its current level of 4.2% and higher than the June estimate, while economic growth will stabilize at a rate of 2% over the next few years.

Officials also see a more benign inflation environment, with PCE falling back toward target in 2026. The median estimate for “core” inflation, which excludes volatile food and energy prices, has been revised down to 2.6% for this year, before falling to 2.2% and 2% over the next two years.