The Federal Reserve on Wednesday cut interest rates for the first time in four years, taking a step back from aggressive efforts to cool the world's largest economy and tame inflation.
The U.S. central bank, which raised interest rates to their highest level in 20 years after inflation surged to the highest level in a generation, announced a 50 basis point cut.
Fed policymakers plan to cut interest rates by another 50 basis points this year, according to a forecast released at the same time as the news.Wall Street, which had rallied on the news, ended slightly lower, with the S&P 500 down 0.29%.
“It's surprising that when the market gets what it appears to want, it immediately wants more,” Steve Sosnick, chief market strategist at Interactive Brokers, told Reuters.
Inflation has fallen dramatically since peaking in the summer of 2022, but years of rising prices mean many consumers are still struggling with rising costs on everything from food and fuel to rent and travel fares.
As tens of millions of Americans prepare to vote in November, concerns about the strength and direction of the economy have become a key issue in the presidential campaign.
The Federal Reserve's decision to cut its benchmark federal funds rate to 5% from 4.75% marks a key turning point in the fight against inflation.
“The time to act has come,” Fed Chairman Jerome Powell declared last month.
“Today's decision reflects our increasing confidence that, within appropriate recalibrations of the policy stance, we can maintain the strength of the labor market in an environment of moderate growth and inflation declining sustainably to the Fed's 2 percent objective,” he told reporters on Wednesday.
He stressed that after a “good, strong start,” officials would make future rate decisions at their own policy meetings and would not commit to further rate cuts today, and expressed optimism that the U.S. would avoid a recession. “We're not seeing any signals that would suggest a recession is becoming more likely,” he said. “I don't think so.”
Asked whether the central bank was trying to play catch-up and was responding to weak job market data, Powell said, “I don't think we're behind. I think this is timely, but I think you can take this as a signal of our determination not to fall behind.”
At the start of the pandemic, as strict coronavirus lockdowns and restrictions rocked the world, Fed policymakers slashed interest rates to near zero, and stimulus bills approved by Congress pumped trillions of dollars into the U.S. economy.
Less than a year later, a vaccine arrived, restrictions were eased, many people began spending more time outside their homes again, and consumer demand, bolstered by stimulus checks, remained surprisingly strong.
When inflation began to spike in 2021, Fed officials, including Chairman Powell, initially dismissed it as a “temporary” effect of supply and demand fluctuations caused by the pandemic. But the following year, they reversed course and launched an extraordinary campaign to tame the inflation surge.
The Fed plans to hike interest rates 11 times in a row in 2022 and 2023 before leaving them at 5.25% to 5.5% for more than a year to try to bring inflation down to its target.
The consumer price index has not yet reached that level but is getting closer: The latest reading for August was 2.5%, the lowest since February 2021.
The Fed is facing pressure to change policy amid a cooling labor market and growing concerns about a broader economic slowdown.
“It is clearly time for the Fed to lower interest rates,” Democratic Senators Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper wrote to Powell on Monday. “In fact, it may be too late. Your delays have endangered the economy and rendered the Fed obsolete.”
Powell defended the central bank's decision, saying “our patient approach over the past year has paid off,” and “inflation is now closer to our goal, and we have increasing confidence that inflation is moving sustainably toward 2 percent.”
Other central banks around the world are also watching closely: interest rate deciders on the Bank of England's Monetary Policy Committee are due to make their next decision on Thursday.
The Fed is independent, but its decision to cut rates less than 50 days before the election is likely to draw political scrutiny. Donald Trump, who broke with tradition and pressured the central bank to cut rates during his presidency, has said they should not be cut so close to the election.
Trump has also signaled that he will have a say in Fed decisions if he returns to the White House, although Senator Kamala Harris has stressed that she will not “interfere” in Fed deliberations.
Powell explicitly denied claims that the Fed's latest decision had anything to do with the election.
“This is my fourth run for the Federal Reserve and it's always the same,” he told reporters. “We come to this meeting specifically asking what's the right thing to do for the people that we serve, and we do that and we make a decision as a group and we announce it. It's always been that way, and never anything else.”
