Fed Kicks Off First Rate Cuts in 4 Years with Aggressive 50 bps Slash

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Fed Kicks Off First Rate Cuts in 4 Years with Aggressive 50 bps Slash

On Wednesday, the Federal Reserve implemented its first interest rate reduction since the early stages of the Covid pandemic, cutting benchmark rates by half a percentage point to counteract a potential slowdown in the labor market.

With both inflation and the job market showing signs of weakening, the Federal Open Market Committee (FOMC) decided to lower its key overnight borrowing rate by 50 basis points, aligning with market expectations that had shifted toward a larger cut.

Apart from the emergency rate cuts during the pandemic, the last time the FOMC reduced rates by half a point was during the 2008 global financial crisis.

This decision brings the federal funds rate down to a range of 4.75%-5%. While this rate directly affects short-term bank borrowing costs, it also influences various consumer products like mortgages, auto loans, and credit cards.

 The Federal Reserve's post-meeting statement expressed increased confidence that inflation is moving steadily toward the 2% target and noted that the risks to its employment and inflation objectives are now more balanced.

Labor market data released on Thursday showed weekly jobless claims dropped by 12,000 to 219,000, significantly below expectations. This better-than-anticipated result reassured investors that the economy is on track for a soft landing.

Additionally, the Federal Open Market Committee’s "dot plot" projections indicated another 50 basis points in rate cuts are expected by the end of 2024. The Fed also signaled a full percentage point of cuts by the end of 2025, followed by a half-point reduction in 2026.

Meanwhile, the Bank of England announced on Thursday that it would keep interest rates unchanged after cutting them for the first time in over four years in August, citing high inflation in the services sector and the need for a gradual approach to easing monetary policy.

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Sources:

  1. Federal Reserve
  2. US News

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