The US Federal Reserve cut its key lending rate by half a percentage-point Wednesday in its first reduction since the Covid pandemic, sharply lowering borrowing costs just before November’s presidential election.
The Fed’s decision will affect the rates at which commercial banks lend to consumers and businesses, bringing down the cost of borrowing on everything from mortgages to credit cards.
The news will likely be well-received by Democratic candidate Kamala Harris, who has looked to highlight President Joe Biden’s economic record in her race against Republican Donald Trump.
Policymakers voted 11-to-1 in favor of lowering the central bank’s benchmark rate to between 4.75 percent and 5.00 percent, the Fed announced in a statement.
They also penciled in an additional half-point of cuts before the end of this year, and an added percentage point of cuts in 2025.
“It is time to recalibrate our policy to something that is more appropriate given the progress on inflation, and on employment moving to a more sustainable level,” Fed Chair Powell told reporters after the decision was announced.
“This is the beginning of that process,” he added.
Fed ‘gained greater confidence’
The Fed said its rate-setting committee “has gained greater confidence” that inflation was moving toward its long-term two percent target.
It added that “the risks to achieving its employment and inflation goals are roughly in balance.”
The bank has a dual mandate from Congress to act independently to tackle both inflation and employment.
Analysts were expecting the Fed to cut rates on Wednesday, as inflation eases, and the labor market continues to cool in the surprisingly resilient post-Covid economy.
But they were uncertain about the size of the move, with some anticipating a quarter of a percentage point, and others predicting the more significant half-point cut, which carries a greater risk of reigniting inflation.
“The key question is, when they say they want to be less restrictive, what does less restrictive look like?” Citi global chief economist Nathan Sheets told AFP after the decision.
“Is that a smooth path back to neutral? Or are they thinking about it as, now we’re very restrictive, and we want to adjust to a somewhat less restrictive position.”
In updated forecasts published alongside the Fed’s rate decision, policymakers’ median forecasts pointed to an unemployment rate of 4.4 percent in the fourth quarter of this year, up from 4.0 percent in the last update in June.
They also penciled in an annual headline inflation rate of 2.3 percent, slightly lower than in June.
“The next steps to me are not so clear, but it wouldn’t surprise me if they ended up being more aggressive” than suggested in the forecasts, Sheets said.
Election stakes
The Fed’s mandate gives it the independence to set monetary policy solely on the basis of economic data.
But its decision will have political ramifications, given the importance of inflation and the cost of living to US consumers.
Americans have consistently said both are top concerns ahead of the election.
Trump has repeatedly criticized Powell, who he first appointed to run the Fed, and has suggested that its decisions are political — accusations the US central bank has strongly refuted.
Harris praised the US Federal Reserve’s decision to lower interest rates Wednesday, while reiterating her commitment to fighting inflation.
“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” the Vice President said in a statement.
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