The US Federal Reserve has announced a 50-basis-point cut in its benchmark interest rate, reducing it to 4.75%–5.00%, marking the first rate reduction in four years.
The decision, unveiled on September 18 following the Fed’s sixth policy meeting of 2024, aligns with Wall Street forecasts and reflects a shift in focus from combating inflation to supporting a weakening job market.
As the economy shows signs of slowing, the Federal Reserve aims to achieve a “soft landing” by balancing inflation control with economic growth, avoiding the risks of a deeper downturn.
Fed cuts interest rate: shifts in strategy
The Fed’s decision to reduce interest rates by 50 basis points indicates a shift in its strategy, prioritizing economic growth alongside inflation control.
For over a year, inflation had remained slightly above the Fed’s 2% target, prompting a series of aggressive rate hikes.
However, the recent slowdown in the labor market has prompted the central bank to ease borrowing costs.
This move is seen as a necessary adjustment to stabilize the economy as it faces growing risks of contraction.
This rate cut marks a strategic pivot, suggesting that the Fed is preparing for further cuts in 2025 to mitigate the impact of a slowing economy.
With inflation stabilizing, the focus is now on stimulating economic activity while maintaining price stability.
The Fed’s move aims to ease financial conditions, which could encourage borrowing, spur consumer spending, and offer relief to businesses struggling with high interest rates.
Jerome Powell’s balancing act
Federal Reserve Chair Jerome Powell and the Federal Open Market Committee (FOMC) face the challenging task of navigating the economy through uncertain times.
Since March 2022, the Fed has raised interest rates by a total of 5.25 percentage points to combat the most significant inflation surge in four decades.
At its peak, the benchmark rate had reached a 23-year high of 5.25%–5.50%.
Now, with inflation moderating, the Fed is adopting a more cautious approach.
Powell and the committee must balance the need to support economic growth without reigniting inflationary pressures.
The rate cut is a signal that while inflation remains a concern, the central bank is increasingly focused on preventing the economy from slipping into recession.
Rate cuts expected to continue?
The latest rate cut is expected to be part of a longer cycle of reductions, with further cuts anticipated in 2025.
Economists predict that as the US economy continues to show signs of slowing, the Fed will gradually lower rates to provide more flexibility for businesses and consumers.
These cuts aim to loosen financial conditions, which have been tight for the past year.
By making borrowing more affordable, the Fed hopes to encourage more investment, job creation, and consumer spending, which could alleviate some of the pressures on the labor market.
The Fed’s decision to cut rates follows months of steady rate hikes and a unanimous vote at its July 31 meeting to hold rates at their 23-year high.
The shift from inflation control to economic stabilization reflects the central bank’s commitment to balancing its dual mandate of price stability and full employment.
This 50-basis-point reduction is part of a broader effort to prevent a significant economic slowdown. As inflation appears to be stabilizing, the Fed’s policymakers are focused on keeping the economy on track, particularly as the US approaches the peak of the political cycle.
What’s next for the US economy?
With the US presidential election just around the corner, the Fed’s actions could have political ramifications, adding complexity to the decision-making process.
As the central bank continues to adjust its policies, it will closely monitor the labor market, inflation trends, and broader economic indicators.
Economists expect further rate cuts before the end of 2024, as the Fed works to maintain a delicate balance between supporting growth and controlling inflation.
The coming months will be crucial in determining how effective the Fed’s approach will be in stabilizing the economy without triggering a recession.
Market participants and investors are closely watching for the next moves, as they brace for the ongoing impact of these policy changes.
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