The US central bank has lowered interest rates for the first time in more than four years.
The Federal Reserve reduced its key lending rate by 0.5 percentage points, bringing it to a range of 4.75% to 5%.
Jerome Powell, the head of the Federal Reserve, described this move as “strong,” stating it was necessary due to easing price rises and growing concerns about the job market.
This decision will provide relief to US borrowers who have been facing the highest interest rates in over two decades.
The rate cut was larger than many analysts expected, and forecasts suggest that rates could fall another half percentage point by the end of the year.
Powell emphasized that this aggressive action aims to prevent high borrowing costs from negatively impacting the US economy.
“The labor market is in a strong place—we want to keep it there,” he said.
This decision follows similar cuts by other central banks in Europe, the UK, and Canada, and many had anticipated a reduction.
However, there was uncertainty about how large the cut would be before the meeting.
Isaac Stell, an investment manager, noted that policymakers seem to want to be proactive, even without significant economic issues on the horizon.
Since 2022, the Fed has raised interest rates sharply to control inflation, which was rising at the fastest pace since the 1980s.
These increases made mortgages, car loans, and other debts more expensive, aiming to reduce spending and ease price pressures.
As inflation has started to decline, officials are now more concerned about the risks of high rates on the broader economy.
The unemployment rate has risen to 4.2% from 3.7% at the start of the year, indicating a slowdown in hiring.
Projections show that inflation is expected to decrease faster, but unemployment could rise to 4.4% by the end of 2024.
Powell acknowledged the labor market had been too strong last year and welcomed some cooling but stressed he doesn’t see signs of a significant economic downturn.
Recent figures show that the US economy grew at an annual rate of 3% over the three months ending in June, and retail spending remains strong.
Inflation fell to 2.5% in August, approaching the Fed’s target of 2% for the fifth consecutive month.
Interestingly, one Fed governor, Michelle Bowman, voted against the rate cut, marking the first dissent since 2005.
Historically, the Fed has announced cuts of 0.5 percentage points during crises, like the COVID-19 pandemic and the 2008 financial crash.
However, economist Randall Kroszner noted that this announcement is significant not just for the size of the cut but for signaling a new period of lower borrowing costs.
The Fed had kept its key rate steady since July 2023, and forecasts now indicate that the rate could drop to about 4.4% by the end of the year and 3.4% by the end of 2025—much lower than expectations just a few months ago.
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