NEWS

The US Federal Reserve decided to cut interest rates by 50 basis points, to fall from 5.5% to 5.00%.

The US Federal Reserve approved on Wednesday its first interest rate cut since the early days of the Covid-19 pandemic, cutting interest by half a percentage point in an attempt to avoid a slowdown in the labor market.

With both the job market and inflation declining, the Federal Open Market Committee (FOMC) chose to cut the key interest rate by 50 basis points, which is in line with market expectations that have recently shifted towards a cut of this size.

Apart from the emergency cuts that took place during the Covid pandemic, the last time the Federal Committee cut interest rates by half a percentage point was in 2008 during the global financial crisis.

This decision reduces the federal funds rate to a range between 4.75% and 5%. Although this rate determines the short-term borrowing costs for banks, its impact extends to many consumer products such as mortgages, personal loans, and credit cards.

Along with the cut, the committee also signaled in its projections an additional 50 basis points of cuts by the end of the year, roughly in line with market expectations. Officials projected an additional 1% cut by the end of 2025, and an additional half-point in 2026. Overall, the benchmark rate is expected to fall by 2% after Wednesday’s move.

“The committee increased its confidence that inflation is moving toward its 2% target in a sustainable manner, and considers that risks to achieving its employment and inflation goals are balanced,” the committee said in its statement after the meeting.

In its assessment of the state of the economy, the committee noted that “job growth has slowed and the unemployment rate has increased but remains low.” Officials also raised their unemployment rate forecast for this year to 4.4% from 4% in the previous June update, and lowered their inflation forecast to 2.3% from 2.6%.

Despite the strength of economic indicators, the Fed decided to proceed with the rate cut. GDP has been growing steadily, and the Atlanta Fed expects 3% growth in the third quarter on continued strength in consumer spending. The cut comes despite inflation indicators still running above the Fed’s 2% target, with its preferred measures showing inflation hovering around 2.5%. The decision is expected to have a global impact, as the Fed is at the heart of the global financial system, and several other central banks have already begun cutting interest rates.