Image Source : REUTERS/FILE PHOTO The Federal Reserve building in Washington.
The US Federal Reserve has reduced its benchmark interest rate by 50 basis points, the first such move since 2020. This signals the central bank’s shift away from its restrictive stance aimed at controlling inflation. The new benchmark rate now falls within the range of 5.25% to 5.50%. The rate cut ends a 14-month period where rates were held steady. This duration is longer than three of the last six Fed “hold” periods but falls short of the 15-month pause before the 2007-2009 financial crisis.
Historical context of the Fed’s hold periods
In comparison, the Fed’s longest “hold” period occurred during the late 1990s, known as the “Great Moderation,” which saw rates unchanged for 18 months. The recent rate cut is seen as a response to balancing growth and inflation as economic conditions evolve.
Rate cut details
The Fed lowered its benchmark lending rate to between 4.75% and 5.00% with an 11-to-1 vote.
Additional half-point cuts are anticipated before the end of 2024.
Further cuts of one percentage point are forecasted for 2025.
Impact on borrowing costs
The Fed’s move will reduce borrowing costs for consumers and businesses, making mortgages, credit cards, and other loans more affordable. This change is likely to boost economic growth, particularly in the run-up to the presidential election.
Fed’s rationale
The rate cut reflects the Fed’s growing confidence that inflation is approaching its 2% target. Policymakers believe the risks to achieving employment and inflation goals are now balanced. The central bank aims to tackle both inflation and employment, adhering to its dual mandate from Congress.
Economic forecasts
Updated forecasts indicate:
Unemployment rate: 4.4% in Q4 2024, up from 4.0% in June.
Annual headline inflation rate: 2.3%, slightly lower than in June.
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