The US Federal Reserve dropped its key lending rate by half a percentage point on Wednesday, the first fall in more than four years, drastically slashing borrowing rates just before the November presidential election.
The Fed’s decision will influence the interest rates at which commercial banks lend to households and businesses, lowering the cost of borrowing for everything from mortgages to credit cards.
The move signals the end of the Fed’s high interest rate environment targeted at stifling demand, with inflation now approaching the central bank’s long-term two-percent target and the labor market continuing to cool despite a remarkably healthy post-Covid economy.
Against this backdrop, Wednesday’s significant Fed rate cut is most likely good news for Democratic presidential candidate and US Vice President Kamala Harris, who is running against Republican former President Donald Trump in the forthcoming election.
“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 said in a statement.
At an event in New York on Wednesday, Trump told reporters that the independent US central bank’s decision was either a response to a “very bad” economy, or it had been “playing politics.”
“But it was a big cut,” he added.
Major US stock indices finished lower following the Fed’s decision.
11-to-1 in favour
Policymakers voted 11-to-1 in favor of lowering the central bank’s benchmark rate to between 4.75 percent and 5.00 percent, the Fed announced in a statement.
They also penciled in an additional half-point of cuts before the end of this year, and an added percentage-point of cuts in 2025.
“It is time to recalibrate our policy to something that is more appropriate, given the progress on inflation, and on employment moving to a more sustainable level,” Fed Chair Jerome Powell told reporters after the decision was announced.
“This is the beginning of that process,” he added.
Analysts had widely expected the Fed to reduce rates on Wednesday, but were uncertain if it would cut by 25 basis points or 50.
A smaller cut would have been a more conventional step, while the larger move does more to stimulate demand, but also carries a greater risk of reigniting inflation.
“I was a little surprised it was 50 (basis points) and not 25, but I think the chairman did a nice job of explaining,” former Boston Fed president Eric Rosengren told AFP.
The Fed’s rate-setting committee most likely went for the larger cut in response to recent weaker-than-expected jobs data and the “very positive news” on inflation, added Rosengren, a visiting scholar at MIT.
“I don’t think it’s panic. I think it’s more a strategic decision by the Fed,” Citi global chief economist Nathan Sheets told AFP, adding that the next steps were “not so clear.”
In updated forecasts published alongside the Fed’s rate decision, policymakers’ median projections pointed to an unemployment rate of 4.4 percent in the fourth quarter of this year, up from 4.0 percent in the last update in June.
They also penciled in an annual headline inflation rate of 2.3 percent, slightly lower than in June.
Futures traders see a roughly 65-percent chance that the Fed will cut by at least another 75 basis points this year, according to CME Group data.
Election Stakes
Congress has given the Fed a dual responsibility to act independently on inflation and employment.
However, its judgment will have political consequences, given the importance of inflation and the cost of living to US consumers in this presidential race.
Trump has regularly criticized Powell, whom he first picked to lead the Fed, and recently stated that the US president should have “at least” a role in interest rate decisions.
On Wednesday, Fed Chair Powell stated that the bank’s independence was “good for the public,” and that he hoped and expected this arrangement to continue.
“We’re not serving any politician, any political figure, any cause, any issue, nothing,” he added, in response to a question about the Fed’s independence.