Fed Cuts Interest Rates By Half-Point in First Rate Cut in Four Years
The Federal Reserve’s sizeable 50bp rate cut marks a dramatic shift in the central bank’s monetary policy focus.
In a move that signals a significant pivot in monetary policy, the Federal Reserve cut its benchmark interest rate by 50 basis points on Wednesday, lowering it to a range of 4.75% to 5%. This marks the Fed’s first interest rate reduction since the pandemic, as inflation continues to decline and concerns grow over the labor market’s health.
The half-point cut is seen as a bold step, with the central bank now emphasizing employment stability over its inflation-fighting stance. Inflation has dropped sharply from its 2022 peak of 9.1% to 2.5% in August, nearing the Fed’s target of 2%.
Fed Chair Jerome Powell commented:
“The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and we are now focusing on balancing employment goals with inflation risks.”
Reasons Behind the Rate Cut
The decision to lower interest rates was driven by a confluence of factors. Inflationary pressures have eased, but signs of a slowing labor market raised concerns within the Federal Open Market Committee (FOMC). Job growth has softened, and the unemployment rate has risen to 4.2%, slightly higher than the half-century low recorded in 2023. According to the Fed’s projections, unemployment is expected to rise to 4.4% by year’s end.
While inflation is no longer seen as an immediate threat, persistently high prices for essentials like groceries and gas remain a point of public dissatisfaction. Former President Donald Trump has criticized the Biden administration’s handling of the economy, while Vice President Kamala Harris has warned that Trump’s proposed tariffs would further elevate consumer costs.
The Fed’s policymakers anticipate additional rate cuts in the near future. Two more half-point reductions are expected before the end of 2024, bringing the rate closer to the long-term neutral target of 2.9%.
Impact on Borrowing and Spending
Lower interest rates typically offer relief to consumers and businesses alike. The Fed’s decision will reduce borrowing costs across the economy, particularly in sectors like housing and automotive loans. Mortgage rates, already trending downward in anticipation of the rate cut, dropped to an 18-month low of 6.2%. Freddie Mac, which tracks mortgage rates, noted a “significant jump” in refinancing activity as homeowners take advantage of lower rates.
Businesses, too, stand to benefit from the more favorable lending environment. “The reduced borrowing costs will allow companies to invest more freely, which could stimulate hiring,” said a senior economist at the U.S. Chamber of Commerce. However, high-yield savings accounts and certificates of deposit (CDs), which had provided consumers with strong returns during the rate-hiking cycle, will see reduced interest yields as rates fall.
Concerns Over the Labor Market
Although the Fed’s decision aims to stabilize economic growth, the health of the labor market remains in question. Michelle Bowman, a member of the Fed’s Board of Governors, was the lone dissenter in Wednesday’s vote, advocating for a more conservative quarter-point cut. She cited concerns that inflationary pressures might not be entirely subdued and that an aggressive rate reduction could lead to further job losses.
While the Fed’s official statement maintains that “job gains have slowed but remain steady,” many experts are cautious about the potential for a more pronounced downturn in employment. “Once unemployment begins to rise, it tends to continue increasing, which could create challenges for the broader economy,” noted a former Fed economist.
Looking Ahead
As the Fed moves away from its inflation-fighting stance, its focus on supporting the labor market may introduce new challenges. Some central banks, including the Bank of England and the European Central Bank, have already begun to follow the Fed’s lead in cutting rates. The Fed’s decision is expected to influence other global financial markets, as economies adjust to shifting monetary policies.
Despite concerns over the job market, the Fed remains optimistic about long-term economic growth. The U.S. economy has continued to expand, with GDP growth projections hovering around 2% for the next year. As
Powell stated during his post-meeting press conference:
“We believe these rate cuts are a step toward achieving a balanced approach to price stability and full employment.”
Source: Federal Reserve YouTube
The coming months will reveal whether the Fed’s aggressive rate cuts will effectively balance inflation control with job market stability. For now, consumers and businesses alike are likely to benefit from lower borrowing costs and a more favorable economic outlook.
Stock Market Activity
Following the Federal Reserve’s announcement today that it was slashing interest rates by 50bp, all three major US stock market indices rallied with the S&P 500 Index ($SPX) currently up 0.28%, last trading at 5,650.23.
Meanwhile, the Dow Jones Industrials Average ($DOWI) last traded at 41,693.95, up 0.21% today, while the NASDAQ Composite ($NASX) is currently trading at 17,746.64, up 0.67%.
The SPDR SP 500 ETF Trust (NYSE Arca: SPY), a popular ETF that effectively mimics the price and yield performance of the S&P 500 Index is currently down 0.07%, last trading at $562.69.
Other notable movers from today’s trading session include:
The Russell 2000 Index (RUT), a small-cap market index made up of the smallest 2,000 stocks in the Russell 3000 Index (RUA) is currently up 1.92%, last trading at 2,247.83.
The Russell 2000 Ishares ETF (IWM), an ETF that tracks the Russell 2000 Index is currently changing hands at $220.97, up 0.71%.
The Russell Microcap Index (RUMIC) last traded at 788.70, up 1.73% today.
View Russell 2000 Ishares ETF Chart on Barchart
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Disclaimer: Wealthy VC does not hold a position in any of the stocks, ETFs or cryptocurrencies mentioned in this article.
