Fed surprises with half-point interest rate cut

With the warning: We are not declaring victory over inflationThe US central bank decided to reduce the range of the federal funds rate, which determines the cost of credit used by companies and individuals, by 0.5 percentage points, to place it between 4.75 and 5 percent.

After eight consecutive monetary policy meetings with the highest rate in two decades, the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) decided yesterday to lower its reference rates, the first cut since 2020, seeking to prevent the cooling of the labor market from turning into a deeper freeze.

Although the monetary decision was not unanimous, with one member voting for a 0.25 percentage point cut, the Fed has indicated that rates could remain below 4.5 percent by the end of the year, since it will not opt ​​for a bolder path in the rate-cutting cycle.

The committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and it judges that the risks to achieving its employment and inflation goals are roughly in balance.the monetary authority highlighted in its economic policy statement.

The US central bank was not the first monetary authority in industrialised countries to cut interest rates, but it is the signal that its counterparts in the United Kingdom, the euro zone and Canada, which had already taken a first step, were waiting for. Other countries, such as Mexico, India and South Korea, were essentially waiting for the size of the Fed’s move.

The Bank of Mexico (BdeM), which will hold its monetary policy meeting on the 26th, will take into account the position revealed by the Fed to include it in its analysis and monetary decision-making. So far, the consensus of analysts expects a decrease of 0.25 percentage points.

At a press conference, Jerome Powell, president of the Fed, declared that with the monetary movement they are not declaring victory over inflation; in addition to guaranteeing that the monetary authority did not take long to lower rates, as the market considers, so No one should look at today’s decision (the half percentage point cut) and think that this will be the pace (of rate cuts).

High interest rates seek to control inflation by discouraging borrowing and spending, allowing supply and demand to balance.

More unemployment, less inflation

The Fed said in its statement that U.S. economic activity has continued to expand at a solid pace, although employment has slowed, and the unemployment rate has risen but remains low. Inflation has moved closer to the FOMC’s 2 percent target but remains somewhat elevated.

Gross domestic product (GDP) growth estimates for 2024 were lowered from 2.1 to 2 percent; and for 2025 and 2026 they were kept unchanged at 2 percent.

The inflation forecast was revised downwards from 2.6 to 2.3 percent for 2024, from 2.3 to 2.1 percent for 2025, and the 2 percent target will be reached in 2026.

The FOMC still sees rate cuts of an additional 0.5 to 0.75 percentage points, which would bring the rate to a range of 4.25-4.5 percent by the end of 2024, and 3-3.25 percent next year.

The federal funds rate is expected to continue to adjust throughout 2024. Of the 19 committee members, an accumulated cut of 0.5 percentage points is expected; seven see a cut of 0.25 points; two do not anticipate additional cuts and one foresees an accumulated cut of 0.75 percentage points.