US Fed cuts interest rates by 50 bps, 'era of "cheap money" is unlikely to return', says Powell
The US Federal Reserve made a significant move on Wednesday by cutting its key lending rate by half a percentage point, marking the first such reduction since the pandemic. The decision lowered the benchmark rate to a range between 4.75% and 5%, just weeks before the upcoming presidential election. The Federal Open Market Committee (FOMC) voted 11-to-1 in favor of the cut, with Fed Governor Michelle Bowman dissenting, advocating for a smaller quarter-point reduction instead. Fed Chair Jerome Powell emphasized that this cut is a "recalibration" of policy, with the Fed continuing to make rate decisions on a meeting-by-meeting basis.
Powell downplayed concerns about a heightened risk of economic downturn following the rate cut and clarified that the era of "cheap money" is unlikely to return. The Fed is focused on maintaining stable inflation while preventing significant increases in unemployment. Powell stressed the importance of restoring price stability without causing sharp rises in unemployment, as often happens during periods of disinflation.
This rate cut comes after eight consecutive meetings where the benchmark rate remained at a 23-year high. Additionally, Fed officials projected further rate cuts—another half-point reduction by the end of the year, followed by more in 2025, aiming for a target range of 2.75% to 3.00% by 2026.
The Fed's decision will lower borrowing costs for consumers and businesses, affecting loans, mortgages, and credit cards. Inflation has already fallen significantly from a peak of 9.1% in mid-2022 to 2.5% in August 2024, nearing the Fed's 2% target. As inflation stabilizes, the Fed is shifting its attention to supporting a weakening job market while attempting to achieve a “soft landing” that avoids a deep recession.
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