(and, it also appears the stock market is responding
with a big move up)
Federal Reserve
Fed slashes interest rates by a half point, an
aggressive start to its first easing campaign in four
years
Published Wed, Sep 18 20242:00 PM EDTUpdated 2 Min Ago
Jeff Cox
@jeff.cox.7528
@JeffCoxCNBCcom
WASHINGTON – The Federal Reserve on Wednesday enacted
its first interest rate cut since the early days of the
Covid pandemic, slicing half a percentage point off
benchmark rates in an effort to head off a slowdown in
the labor market.
With both the jobs picture and inflation softening, the
central bank’s Federal Open Market Committee chose to
lower its key overnight borrowing rate by a half
percentage point, or 50 basis points, affirming market
expectations that had recently shifted from an outlook
for a cut half that size.
Outside of the emergency rate cuts during Covid, the
last time the FOMC cut by half a point was in 2008
during the global financial crisis.
The decision lowers the federal funds rate to a range
between 4.75%-5%. While the rate sets short-term
borrowing costs for banks, it spills over into multiple
consumer products such as mortgages, auto loans and
credit cards.
In addition to this reduction, the committee indicated
through its “dot plot” the equivalent of 50 more basis
points cut by the end of the year, close to market
pricing. The matrix of individual officials’
expectations pointed to another full percentage point
in cuts by the end of 2025 and a half-point in 2026. In
all, the dot plot shows the benchmark rate coming down
about 2 percentage points beyond Wednesday’s move.
“The Committee has gained greater confidence that
inflation is moving sustainably toward 2 percent, and
judges that the risks to achieving its employment and
inflation goals are roughly in balance,” the post-
meeting statement said.
The decision to ease came “in light of progress on
inflation and the balance of risks.” The FOMC vote came
by an 11-1 vote, with Governor Michelle Bowman
preferring a quarter-point move.
In assessing the state of the economy, the committee
judged that “job gains have slowed and the unemployment
rate has moved up but remains low.” FOMC officials
raised their expected unemployment rate this year to
4.4%, from the 4% projection at the last update in
June, and lowered the inflation outlook to 2.3% from
2.6% previous. On core inflation, the committee took
down its projection to 2.6%, a 0.2 percentage point
reduction from June.
The committee expects the long-run neutral rate to be
around 2.9%, a level that has drifted higher as the Fed
has struggled to get inflation down to 2%.
The decision comes despite most economic indicators
looking fairly solid.
Gross domestic product has been rising steadily, and
the Atlanta Fed is tracking 3% growth in the third
quarter based on continuing strength in consumer
spending. Moreover, the Fed chose to cut even though
most gauges indicate inflation well ahead of the
central bank’s 2% target. The Fed’s preferred measure
shows inflation running around 2.5%, well below its
peak but still higher than policymakers would like.
However, Fed Chair Jerome Powell and other policymakers
in recent days have expressed concern about the labor
market. While layoffs have shown little sign of
rebounding, hiring has slowed significantly. In fact,
the last time the monthly hiring rate was this low –
3.5% as a share of the labor force – the unemployment
rate was above 6%.
At his press conference following the July meeting,
Powell remarked that a 50 basis point cut was “not
something we’re thinking about right now.”
For the moment, at least, the move helps settle a
contentious debate over how forceful the Fed should
have been with the initial move.
However, it sets the stage for future questions over
how far the central bank should go before it stops
cutting. There was a wide dispersion among members for
where they see rates heading in future years.
Investors’ conviction on the move vacillated in the
days leading up to the meeting. Over the past week, the
odds had shifted to a half-point cut, at 63% for 50
basis points just prior to the decision coming down,
according to the CME Group’s FedWatch gauge.
The Fed last reduced rates on March 16, 2020, part of
an emergency response to an economic shutdown brought
about by the spread of Covid-19. It began hiking in
March 2022 as inflation was climbing to its highest
level in more than 40 years, and last raised rates in
July 2023. During the hiking campaign, the Fed raised
rates 75 basis points four consecutive times.
The current jobless level is 4.2%, drifting higher over
the past year though still at a level that would be
considered full employment.
With the Fed at the center of global financial
universe, Wednesday’s decision likely will reverberate
among other central banks, several of whom already have
started cutting. The factors that drove global
inflation higher were related mainly to the pandemic –
crippled international supply chains, outsized demand
for goods over services, and an unprecedented influx of
monetary and fiscal stimulus.
The Bank of England, European Central Bank and Canada’s
central bank all have cut rates recently, though others
awaited the Fed’s cue.
While the Fed approved the rate hike, it left in place
a program in which it is slowly reducing the size of
its bond holdings. The process, nicknamed “quantitative
tightening,” has brought the Fed’s balance sheet down
to $7.2, a reduction of about $1.7 trillion from its
peak. The Fed is allowing up to $50 billion a month in
maturing Treasurys and mortgage-backed securities to
roll off each month, down from the initial $95 billion
when QT started.
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