WASHINGTON – The U.S. central bank kicked off an expected series of interest rate cuts on Wednesday with a larger-than-normal cut of half a percentage point, which Federal Reserve Chairman Jerome Powell said was intended to show policymakers’ commitment to a maintain a low unemployment rate. now that inflation has decreased.
“We’re off to a good, strong start and I’m very happy that we did that,” Powell said at a news conference after the Fed, citing increased confidence that the country had moved beyond high inflation, cut its key rate by 50 basis points. had reduced. up to the range of 4.75%-5.00%. “The logic of this, both from an economic and risk management perspective, was clear.”
So clearly, in fact, that Powell, who has favored consensus policy since becoming Fed chief in 2018, saw the first dissent from a Fed governor since 2005, when Michelle Bowman voted against the decision in favor of a lower interest of a quarter of a percentage point. austerity — evidence some analysts said of his motivation to start the Fed’s easing cycle in convincing fashion.
Powell called the move a “recalibration” to take into account the sharp decline in inflation since last year; he noted that the economy remained strong, but the central bank wanted to stay ahead of and prevent a weakening in the labor market; Analysts saw a nod to what has been an overarching goal of his to avoid unnecessarily trading higher unemployment to reach the central bank’s 2% inflation target.
“A soft landing is within reach that would seal his legacy as Fed chairman,” said Diane Swonk, chief economist at KPMG.
In addition to approving the half-percentage-point cut on Wednesday, Fed policymakers forecast that the benchmark interest rate would fall another half-percentage point by the end of this year, a full percentage point next year and half a percentage point next year. in 2026, although they cautioned that prospects that far into the future are necessarily uncertain.
The move marks a major turnaround in U.S. monetary policy and a recognition of the Fed’s growing confidence that inflation will continue to decline toward its target. It is currently about half a percentage point above that.
Despite taking place just seven weeks before the US presidential election, the Fed’s policy decision provoked a fairly muted response, at least initially, from presidential candidates.
Vice President Kamala Harris, the Democratic presidential candidate, called the interest rate cut “welcome news” for Americans.
“I know prices are still too high for many middle-class and working families,” she said in a statement.
Republican candidate Donald Trump, who as president first appointed Powell to head the Fed, said the size of the cut indicated the economy could be in trouble.
“For it to go that far, assuming they’re not just doing politics, the economy would be very bad,” Trump told reporters.
However, Powell said the economy remained strong, with many labor market indicators, such as unemployment rates and even the current 4.2% unemployment rate, not at worrying levels.
But he nodded to the same issues that economists and analysts are raising about inflation: that it takes time for changes in monetary policy to take effect and that officials, between anecdotal information from companies and slowed hiring rates, felt they could see further weakness in the labor market just as others have called for quick action to prevent inflation.
“The thinking is that the time to support the labor market is when it is strong, not when you start seeing layoffs,” Powell said.
‘WITH A BANG’
The Fed had kept its key rate in the range of 5.25%-5.50% since July last year, when it ended an 18-month rate hike campaign aimed at controlling the rise in inflation, which rose to the highest level in 40 years in 2022.
Powell declined to declare victory on that front, but he did say that inflation is now near the Fed’s 2% target, and that working conditions are consistent with the central bank’s other goal of maximum employment.
US stocks rose after the release of the statement and updated quarterly economic projections, before reversing course to close lower on the day. The U.S. dollar .DXY was slightly stronger against a basket of currencies, while U.S. Treasury yields rose.
Interest rate futures traders moved to ease even further than forecast by the Fed, with the policy rate now expected to be between 4.00% and 4.25% by the end of this year.
“The Fed ended the break with a bang. It is a strong signal that they are cutting by 50 basis points and expect another 50 basis points this year. This was controversial,” said Brian Jacobsen, chief economist at Annex Wealth Management.
Inflation, based on the Fed’s preferred measure, is currently about half a percentage point above the 2% level, and the new economic projections now show that the annual rate of increase in the price index for personal consumption expenditures will increase by the end of this year. year will drop to 2.3%. This year, the unemployment rate will fall to 2.1% by the end of 2025. The unemployment rate is expected to end this year at 4.4% and remain there through 2025. Economic growth is expected to be 2.1% through 2024 and beyond year 2%, the same as in the last round of projections issued in June. — Reuters