Fed’s First Rate Cut Since 2019
The Federal Reserve made a significant move on Wednesday, cutting its benchmark interest rate by half a percentage point—a dramatic shift after over two years of keeping rates high to combat inflation. This reduction, the first in more than four years, reflects the Fed’s changing focus toward stabilizing the slowing job market. With the economy still grappling with the effects of inflation and rising borrowing costs, this decision could reshape the economic landscape.
The Fed’s decision lowered its key rate to approximately 4.8%, down from a two-decade high of 5.3%, where it had remained for 14 months. This rate hike cycle had been part of the central bank’s aggressive effort to curb the worst inflation the U.S. had seen in four decades. While inflation peaked at 9.1% in mid-2022, it has since dropped to 2.5% as of August 2024, just above the Fed’s target of 2%.
A Path for Future Rate Cuts
Chair Jerome Powell explained the reasoning behind the cut, stating that with inflation largely under control, it was time to “recalibrate” policy. “We’re encouraged by the progress that we have made,” he said, adding that the economy is in a strong position, and the decision is meant to sustain that.
In addition to this rate reduction, the Fed signaled further rate cuts are on the horizon. Policymakers expect to reduce rates by another half-point by the end of 2024, with four more cuts planned in 2025 and two additional cuts in 2026. The central bank’s shift is designed to prevent further job market deterioration as it anticipates some economic slowdown in the coming months.
Impact on Borrowing Costs and Consumer Spending
Lower rates will have a ripple effect across the economy, reducing borrowing costs for auto loans, credit cards, and other debt. While the federal funds rate doesn’t have a direct impact on mortgage rates, which are driven by the market for mortgage-backed securities, mortgage rates are indirectly affected and do tend to follow a similar trajectory to the 10-year Treasury yield. As mortgage rates fall, homeowners could take advantage of these lower rates to refinance their loans, cutting monthly payments and freeing up cash. Businesses, too, may find it easier to borrow for new projects and expansions. Mortgage rates have already dropped to an 18-month low of 6.2%, according to Freddie Mac, and demand for refinancing is rising.
“It’s a step in the right direction,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. She emphasized that further rate cuts would help stabilize the job market and prevent unemployment from rising sharply.
Inflation Eases, but Prices Remain High
Despite progress in reducing inflation, many Americans still feel the pinch from high prices for essentials like groceries, gas, and rent. Former President Donald Trump has criticized the Biden administration for sparking inflation, while Vice President Kamala Harris argues that Trump’s proposed tariffs would drive prices higher.
The Fed projects that inflation will continue to decline, expecting its preferred inflation gauge to drop to 2.3% by the end of the year. However, the central bank anticipates a rise in unemployment, forecasting a rate of 4.4% by year’s end, up from the current 4.2%.
Political Implications and Criticism
With the rate cut coming just weeks before the presidential election, the Fed’s move could have political implications. Trump has previously argued that lowering rates now would amount to political interference, though some Senate Republicans have supported the Fed’s action.
Powell dismissed any suggestion of political motives behind the decision, emphasizing the Fed’s focus on maintaining maximum employment and price stability. “We’re not serving any politician,” Powell said. “It’s just maximum employment and price stability on behalf of all Americans.”
What’s Next for the U.S. Economy?
The Fed’s aggressive rate hikes in 2022 and 2023 helped tame inflation, but they also slowed wage growth and reduced consumer spending. With oil and gas prices falling, inflation is expected to cool further in the coming months. Businesses like Target and McDonald’s are already offering more deals and discounts as consumers push back against high prices.
The Fed’s latest rate cut aims to preserve the health of the labor market and prevent further economic damage. As Rubeela Farooqi, chief U.S. economist at High Frequency Economics, noted, the Fed is now focused on “preventing unnecessary damage to the economy from a pretty restrictive interest rate stance.”
(Source: apnews.com)
Leave a Comment