Federal Reserve cuts key interest rate by sizable half-point
WASHINGTON — The Federal Reserve on Wednesday cut its benchmark interest rate by an unusually large half-point, a dramatic shift after more than two years of high rates that helped tame inflation but also made borrowing painfully expensive for American consumers.
The rate cut, the Fed’s first in more than four years, reflects its new focus on bolstering the job market, which has shown clear signs of slowing. Coming just weeks before the presidential election, the Fed’s move also has the potential to scramble the economic landscape just as Americans prepare to vote.
The central bank’s action lowered its key rate to roughly 4.8%, down from a two-decade high of 5.3%, where it had stood for 14 months as it struggled to curb the worst inflation streak in four decades. Inflation has tumbled from a peak of 9.1% in mid-2022 to a three-year low of 2.5% in August, not far above the Fed’s 2% target.
The Fed’s policymakers also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. And they envision four more rate cuts in 2025 and two in 2026.
In a statement and in a news conference with Chair Jerome Powell, the Fed came closer than it has before to declaring victory over inflation.
“We know it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation,” Powell said. “We’re not saying, ‘mission accomplished’ … but I have to say, though, we’re encouraged by the progress that we have made.”
“The U.S. economy is in a good place,” he added, “and our decision today is designed to keep it there.”
Though the central bank now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers even further.
Rate cuts by the Fed should, over time, lead to lower borrowing costs for mortgages, auto loans and credit cards, boosting Americans’ finances and supporting more spending and growth. Homeowners will be able to refinance mortgages at lower rates, saving on monthly payments, and even shift credit card debt to lower-cost personal loans or home equity lines. Businesses may also borrow and invest more. Average mortgage rates have already dropped to an 18-month low of 6.2%, according to Freddie Mac, spurring a jump in demand for refinancings.
“It’s a step in the right direction,” Laura Rosner-Warburton, senior economist of MarcoPolicy Perspectives, said of Wednesday’s Fed move.
The additional rate cuts it indicated it will make, she said, will “prevent risks from building and the unemployment rate from rising. They are trying to keep the economy in good shape.”
In an updated set of projections, the policymakers collectively envision a faster drop in inflation than they did three months ago but also higher unemployment. They foresee their preferred inflation gauge falling to 2.3% by year’s end, from its current 2.5%, and to 2.1% by the end of 2025. And they now expect the unemployment rate to rise further this year, to 4.4%, from 4.2% now, and to remain there by the end of 2025. That’s above their previous forecasts of 4% for the end of this year and 4.2% for 2025.