Fed cuts rates for first time in 4 years

The Fed has cut interest rates by a massive 50 basis points to 4.75-5%. The decision was expected, although there was uncertainty about the size of the reduction. This is the first reduction in four years. The US central bank also said it would have to lower rates by another 50 basis points this year to a range of 4.25%-4.50%, more than it had forecast in June, as inflation approaches its 2% target and unemployment rises.

Projections have called for a rate cut of a quarter of a point at each of the last two meetings this year, in November and December. By the end of 2025, bankers expect a key rate of 3.4%according to the median of their projections, implying four more quarter-point cuts next year for a total of 100 basis points. In 2026, the projections call for another overall cut of 50 basis points. The policy rate is estimated at 2.9% at the end of 2026 and 2027.

What worries American bankers is the increase in the unemployment rate, now at 4.2%, half a percentage point higher than when the Fed began its year-and-a-half-long hikes in March 2022. The Fed explained that it decided to cut rates in light of progress toward its inflation target. The decision was not taken unanimously, with Governor Michelle Bowman dissenting, who wanted a cut of a quarter of a point.

The stronger-than-expected move is due to GDP estimates for 2024 expected to slightly decline to 2% from 2.1% forecast in June. Unemployment is estimated to rise to 4.4% from 4% in June while PCE inflation this year is expected to decline to 2.3% from 2.6% in June. Core PCE inflation is also expected to decline to 2.6% from 2.8% forecast in June.

Powell’s words

!The Fed’s rate cut is a “start,” the Fed chairman explained at a press conference. Forecasts call for a further half-point cut between now and the end of the year (25 basis points in November and 25 in December). “We know that it is time to recalibrate our policy to be more appropriate, given the progress made on inflation and employment, moving to a more sustainable level. The balance of risks is therefore now balanced, and this is the start of this process,” he explained at a press conference. The Fed will move “as quickly or slowly as we deem appropriate in real time“.

Powell added that he did not believe the central bank had waited too long to cut rates. “We have been very patient” with monetary policy and “we have waited, and I think that patience has paid dividends” in the form of a convincing decline in inflation, he stressed. “The fight against inflation is not over yet,” he said, saying that while inflation pressures have clearly eased, price pressures have not completely cooled. “We are not saying mission accomplished or anything like that” when it comes to getting inflation back to 2%, Powell said. “I will say, though, that we are encouraged by the progress we have made” in getting inflation back to target.

Then the clarification: “The American presidential elections and therefore politics have nothing to do with it. In its decisions, the Fed will take into account nothing but the economy,” he stressed.