The Federal Reserve cut interest rates by half a percentage point, its first cut since the central bank slashed rates to near zero in 2020 as the pandemic hit, in an attempt to signal confidence that inflation will remain tame and prevent unemployment from rising further.
“Recent indicators suggest that economic activity continues to expand at a solid pace. Job gains have slowed and the unemployment rate has risen, but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated,” the Fed said in a statement.
The Federal Reserve's policy interest rate will be in the range of 4.75% to 5% going forward, the last time it was set in April 2023.
Sen. Elizabeth Warren (D-Mass.) and other Democrats have called on Powell to cut rates more aggressively, urging the Fed in a letter to cut the benchmark federal funds rate by three-quarters of a percentage point.
The decision to cut rates reflects Fed officials' growing confidence that inflation is moving sustainably toward their 2 percent target.
Fed officials also said they see risks to their mandate to maintain full employment as greater than the risk of a resurgence in inflation.Earlier this summer, the unemployment rate rose by more than half a percentage point from its recent low, crossing the threshold of the Sam rule, which typically signals that the economy is already in a recession.Claudia Sam, who has studied the rule, said she doesn't think the economy is currently in a recession but is concerned that tight monetary policy could unnecessarily push the unemployment rate even higher.
But evidence of a weakening labor market is scant. Hiring in June and July disappointing, with revisions showing it was weaker than expected. But payroll growth rebounded in August, at least according to preliminary government estimates. Layings are low and jobless claims last week were at the same level as a year ago.
Reports released this week showed that retail spending and industrial production both beat expectations in August.
The last time the Fed began cutting interest rates before the pandemic was in July 2019, when the benchmark interest rate was in the 2% to 2.25% range. At the time, the Fed began cutting rates as a preemptive strike to mitigate the damage to the economy from trade tensions, fearing a coming global economic slowdown.
The Fed also released new economic forecasts from Fed officials. The median forecast for the federal funds rate at the end of this year fell to 4.4% from 5.1%. The forecast for next year was lowered to 3.4% from 4.1%. Officials also see an improving outlook for inflation, with the personal consumption expenditures price index now expected to rise 2.3% instead of 2.6% this year and 2.1% instead of 2.3% next year.
The longer-term outlook for the federal funds rate rose to 2.9%, 0.4 percentage point higher than the 2.5% the Fed had projected from 2019 through the end of last year. In their June forecast, officials had projected the longer-term rate would be 2.8%.
Meanwhile, the unemployment rate is expected to rise. When the Fed last released its forecast in June, officials projected the unemployment rate to be 4% at the end of the year. The new forecast has the unemployment rate rising to 4.4%. Next year, the unemployment rate is expected to remain at 4.4%, up from the previous forecast of 4.2%. Similarly, the median forecast for economic growth has fallen to 2% from 2.1% this year.
