US Fed slashes interest rates by 50 bps for the first time since 2020

Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026 to end in a 2.75-3.00 per cent range.

The endpoint reflects a slight upgrade, from 2.8 per cent to 2.9 per cent, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.

“This decision reflects our growing confidence that with an appropriate recallibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 per cent,” Fed Chair Jerome Powell said at a press conference following the meeting.

US stocks gained following the release of the statement and updated quarterly economic projections, while the US dollar fell against a basket of currencies. US Treasury yields fell.

“The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 basis points and expect another 50 basis points of cuts this year. This was controversial,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Even though inflation “remains somewhat elevated,” the Fed’s latest statement said policymakers chose to cut the overnight rate to the 4.75-5.00 per cent range “in light of the progress on inflation and the balance of risks.”

The central bank “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, it said.

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 Nov. 5.

Following the release of the statement and projections, investors in contracts tied to the Fed’s policy rate put about a 64 per cent probability on a quarter-percentage-point cut at the central bank’s next two-day policy meeting, which begins a day after the election.

LABOUR MARKET SLOWDOWN

The size of the initial cut will likely 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 central bank’s 2 per cent target.

It is currently about half a percentage point above that level, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3 per cent by the end of this year and down to 2.1 per cent by the end of 2025.

The unemployment rate is seen ending this year at 4.4 per cent, higher than the current 4.2 per cent, and remaining there through 2025.

Economic growth is seen at 2.1 per cent through 2024 and 2 per cent 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 per cent range since July of 2023 as inflation fell from a 40-year high to a level now approaching the central bank’s target.

First Published: Sep 18 2024 | 11:53 PM IST