The United States Federal Reserve cut interest rates on 19 September for the first time in four years, aiming to reduce inflation by cooling the world’s largest economy. The Fed announced a cut of 50 basis points, lowering its key rate to roughly 4.8 per cent, down from a two-decade high of 5.3 per cent. This decision comes after inflation tumbled from a peak of 9.1 per cent in mid-2022 to a three-year low of 2.5 per cent in August, nearing the Fed’s 2 per cent target.
Background
The central bank had previously increased rates by 5.25 percentage points between March 2022 and July 2023 to combat the worst inflation streak in four decades. This latest cut is the first and largest since March 2020, when the Covid-19 pandemic severely impacted the economy. The Fed’s aggressive rate hikes had aimed to curb inflation, but with inflation now under control, the focus has shifted to preventing an economic slowdown.
More cuts to come
Policymakers at the Fed project additional rate cuts of 50 basis points before the end of 2024. The interest rate is expected to fall to the 2.75 per cent to 3 per cent range by 2026. Specifically, the Fed anticipates its benchmark rate will decrease by another half percentage point by the end of 2024, a full percentage point in 2025, and a final half percentage point in 2026.
US job market weakening
“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 per cent,” Fed chairman Jerome Powell said at a press conference. The rate cut aims to prevent the economy from slowing and the job market from weakening, especially given the recent uptick in the unemployment rate. While the U.S. economy has so far avoided a recession, hiring and wage growth have slowed. Lower interest rates are intended to make borrowing cheaper for businesses and households, encouraging spending.
Low rates of the past aren’t coming back
Fed policymakers have indicated that they do not expect the policy rate to return to the sub-2 per cent levels seen before 2022. The era of low mortgage rates, often under 4 per cent, is unlikely to return soon, according to Reuters.
Fed has no preset course
Despite inflation remaining somewhat elevated, the Fed’s latest statement noted that policymakers chose to cut the overnight rate “in light of the progress on inflation and the balance of risks.” There is concern that aggressive rate cuts could reignite inflation, but the central bank stated it “would be prepared to adjust the stance of monetary policy” as needed. Powell emphasised that the Fed is not on a “preset course.”
Next big thing: US presidential election
The Fed’s policy meeting this week was its last before the U.S. presidential election on 5 November. The central bank’s next two-day policy meeting will begin a day after the election, potentially influencing future economic decisions based on the election’s outcome.
