WASHINGTON: The Federal Reserve cut interest rates by half of a percentage point on Wednesday, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs that followed growing unease about the health of the job market.

“The committee has gained greater confidence that inflation is moving sustainably toward two per cent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the US central bank’s rate-setting committee said in their latest statement, which drew a dissent from Governor Michelle Bowman, who favoured only a quarter-percentage-point cut.

Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point next year, and by a final half of a percentage point in 2026 to end in a 2.75 per cent- 3pc range.

The endpoint reflects a slight upgrade, from 2.8 pc to 2.9pc, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.

“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2pc,” Fed Chair Jerome Powell said at a press conference following the meeting.

Stocks gained following the release of the statement and updated quarterly economic projections, while the dollar fell against a basket of currencies. Treasury yields fell.

“The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 basis points and expect another 50 basis points of cuts this year. This was controversial,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Even though inflation “remains somewhat elevated”, the Fed’s latest statement said policymakers chose to cut the overnight rate to the 4.75pc-5pc range “in light of the progress on inflation and the balance of risks”.

The central bank “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” with attention to “both sides of its dual mandate” for stable prices and maximum employment, it said.

The Fed’s policy meeting this week was its last before voters go to the polls in what is expected to be a close US presidential election on Nov 5.

Labour market slowdown

The size of the initial cut will likely raise questions about the Fed’s strategy, and whether policymakers were merely trying to account for the fast decline in inflation since last year, or address concerns among some officials that the US job market may be weakening faster than desired or needed to ensure inflation fully returns to the central bank’s two per cent target.

It is currently about half a percentage point above that level, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3pc by the end of this year and down to 2.1pc by the end of next year. The unemployment rate is seen ending this year at 4.4pc, higher than the current 4.2pc, and remaining there through 2025.

Published in Dawn, September 19th, 2024