Fed cuts interest rates by 0.5%

On September 18, the US Federal Reserve (Fed) decided to loosen monetary policy after 4 years. Accordingly, the Fed reduced the reference interest rate by 50 basis points (0.5%), to 4.75-5%.

“The committee is increasingly confident that inflation will moderate sustainably toward 2 percent. The probability of the labor market and inflation achieving the Fed’s objectives is roughly equal,” the Fed said in a statement.

The agency also emphasized that it is “always ready to adjust monetary policy if risks arise.” Fed officials forecast the reference interest rate to decrease by another 0.5% later this year and 1% next year. In 2026, they will lower the interest rate by another 0.5% to bring the interest rate to 2.75-3%.

US stocks reacted immediately to the news. The DJIA rose 303 points, or 0.7%. The S&P 500 and Nasdaq Composite added 0.7% and 0.9%, respectively.

World gold prices also increased vertically, nearly 30 USD, to 2,596 USD an ounce.

The Fed’s benchmark rate applies to overnight interbank loans. It is not the interest rate consumers and businesses pay, but the Fed’s moves affect lending and savings rates.

When interest rates are low, borrowing costs are cheaper. Businesses can invest in new projects or hire more employees when interest rates are low. Similarly, consumers spend more because saving is less attractive.

However, economists say it will take at least a year for the impact of this adjustment to be felt in the economy. This explains why interest rates in the US increased in early 2022, but inflation only started to cool down a year later.

The Fed raised interest rates 11 times from March 2022 to July 2023 to curb inflation. In August, the US consumer price index (CPI) increased by 2.5%, down significantly from its peak of 9% over the same period in 2022. The personal expenditures index (PCE) – the Fed’s preferred inflation measure – has also shown signs of cooling over the past two years.

Job growth has also slowed recently, but the numbers remain positive. Retail sales and industrial production beat forecasts in August. Forecasts from the Atlanta Fed suggest the U.S. could grow 3% in the third quarter.