The Federal Reserve cut interest rates by 50 basis points on Wednesday, the central bank's first rate cut after a two-and-a-half-year battle with rampant inflation sparked by the pandemic.
The new federal funds rate will be 4.75% to 5%, a significant cut that signals the Fed's confidence that the fight against inflation is nearing an end.
The pandemic hit the economy hard, disrupting supply chains, closing stores, and leading to the layoffs of millions of Americans, but as the world began to reopen in the spring of 2021, the economy boomed.
The Consumer Price Index (CPI), an inflation measure that tracks several goods and services, soared above ideal levels. Biden administration officials initially dismissed the rise as “temporary,” but prices continued to rise, and in November 2021, inflation hit its highest level since 1982.
The Federal Reserve gradually raised interest rates from near zero in March 2022 to a range of 5.25% to 5.5% last July to combat rising inflation, which peaked at 9.1% in June 2022.
Rising interest rates raised fears of a recession and layoffs, but no recession occurred and the unemployment rate remained below 4%, the lowest since the 1960s.
The unemployment rate rose to 4.3% in July and 4.2% last month, a relatively low historical rate but still a sign of a labor market “cooling” that the Fed has been watching as it waits to cut rates.
The Consumer Price Index (CPI) also fell below 3% in July for the first time since March 2021, before falling further to 2.5% in August, just short of the Fed's 2% target.
Rising unemployment and encouraging CPI numbers for consumers have sparked concern and new criticism that the Fed is delaying interest rate cuts. Sens. Elizabeth Warren (D-Mass.), Sheldon Whitehouse (D-Iowa) and John Hickenlooper (D-Colo.) wrote to Chairman Powell on Monday, arguing that the Fed's “delay in lowering interest rates is threatening the economy and putting the Fed behind the curve.”
While some economists believe the Fed could have started cutting rates as early as July, the coming months are crucial as the central bank seeks to give the economy a “soft landing,” maintaining its dual mandate of low inflation and maximum employment while cutting interest rates.
It remains to be seen how much and how fast the Fed will cut interest rates going forward. Fed Chairman Jerome Powell told lawmakers earlier this year that the days of zero interest rates were likely over. Central bank forecast in June The median interest rate is expected to fall to 4.1% in 2025 and 3.1% in 2026.
The Fed on Wednesday further lowered its forecast for the central rate to 3.4% next year and 2.9% in 2026.New economic forecasts.
“This is just the first cut in a rate-cutting cycle. The size and frequency of future cuts will give us a better idea of whether the Fed thinks it is behind or ahead of the curve,” said Jonathan Earnest, an economics professor at Case Western Reserve University.
Updated 2:15 p.m.
