The US Federal Reserve has cut its benchmark interest rate by 50 basis points, the first such move since 2020. This signals that the central bank is moving away from its restrictive stance aimed at controlling inflation. The new benchmark rate now stands in the range of 5.25% to 5.50%. The rate cut ends a 14-month period in which rates were held steady. This duration is longer than three of the last six Fed “holding” periods, but falls short of the 15-month pause before the 2007-2009 financial crisis.
Historical context of Fed holding periods
By comparison, the Fed’s longest “hold” period occurred in the late 1990s, known as the “Great Moderation,” when rates were kept unchanged for 18 months. The recent rate cut is seen as a response to balance growth and inflation as economic conditions evolve.
Details of the rate cut
- The Federal Reserve cut its benchmark interest rate to between 4.75% and 5.00% by a vote of 11 to 1.
- Additional half-point cuts are expected before the end of 2024.
- Further cuts of one percentage point are planned for 2025.
Impact on borrowing costs
The Fed’s move will lower borrowing costs for consumers and businesses, making mortgages, credit cards and other loans more affordable. This change is likely to boost economic growth, particularly in the run-up to the presidential election.
The Federal Reserve’s reasoning
The rate cut reflects the Fed’s growing confidence that inflation is moving closer to its 2% target. Policymakers believe the risks to achieving the employment and inflation goals are now balanced. The central bank aims to address both inflation and employment, fulfilling the dual mandate given to it by Congress.
Economic forecasts
Updated forecasts indicate:
Unemployment rate:4.4% in the fourth quarter of 2024, compared to 4.0% in June.
Annual general inflation rate:2.3%, slightly lower than in June.
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