The Federal Reserve made an unexpected move by cutting its benchmark interest rate by a half-point, marking its first rate cut in over four years and lowering the key rate to approximately 4.8% from a two-decade high of 5.3%.
The rate cut signals the Fed’s prioritization of boosting the job market, which has shown signs of slowing, after a period of high rates that helped control inflation but caused borrowing costs to increase for consumers.
The big picture: The Fed anticipates further rate cuts in November and December and projects additional cuts in 2025 and 2026 to support inflation reduction and employment.
- Despite the Fed’s belief that inflation is under control, high prices for essentials remain a concern for many Americans, with differing political narratives attributing the inflationary pressures to various administrations and policy decisions.
- Lower borrowing costs resulting from rate cuts are expected to benefit consumers through reduced costs for mortgages, auto loans, and credit cards, potentially prompting increased spending and economic growth.
Driving the news: The Fed’s updated projections foresee a quicker decline in inflation but higher unemployment rates than previously anticipated, with a projected decrease in their preferred inflation gauge to 2.1% by the end of 2025 and unemployment rising to 4.4% by the end of this year.
- The Fed’s decision to cut rates was met with the first dissent from a governing board member since 2005, reflecting differing views on the appropriate magnitude of the rate cut amidst changing economic conditions and job market dynamics.
- The Fed’s reversal of previous inflation-fighting policies, coupled with sustained wage growth and falling oil and gas prices, suggests an ongoing cooling of inflation and consumer-driven pressure on companies to offer deals and discounts.
