US Federal Reserve Cuts Interest Rates After Four Years: A 50 bps Reduction, More Cuts Expected This Year
The US Federal Reserve has announced a reduction in interest rates for the first time since the pandemic, as widely anticipated. In a statement, the Federal Open Market Committee (FOMC) declared a 50 basis points (bps) rate cut in September, marking the first such cut in over four years. The current interest rates now range between 4.75% and 5%, down from the previous range of 5.25% to 5.5%.
Federal Reserve Chairman Jerome Powell’s Statement
Following the decision, Federal Reserve Chairman Jerome Powell emphasized that he does not believe there was any delay in implementing the rate cut. He also clarified that despite the 0.5% reduction, this does not imply the fight against inflation is over. Powell reiterated that more work is needed to address inflationary pressures.
He highlighted that the US economy remains strong, and the Fed aims to keep it that way. The Federal Reserve projects a 2% GDP growth for the US economy in 2024.
A Near-Unanimous Decision
The Federal Reserve had maintained interest rates unchanged for eight consecutive meetings leading up to July. Before this cut, the benchmark rates had been held at their highest level in 22 years. Powell stated that there was broad support for the 50 bps cut, with 11 out of 12 FOMC members voting in favor. Only one member supported a smaller 25 bps cut.
More Rate Cuts Likely Ahead
Mid-level officials predict that there could be a total reduction of 1% in interest rates by the end of this year, indicating that two more quarter-point cuts or another large 50 bps cut could follow. Out of the 19 officials, nine anticipate a reduction of 75 bps or less. For 2025, the median rate forecast has been revised down from 4.1% to 3.4%, which could mean four additional quarter-point changes next year.
Inflation Outlook and the Federal Reserve’s Goals
The Federal Reserve has revised its inflation outlook, lowering its expectations for overall inflation to 2.3%, down from the previous 2.6%. Core inflation projections were also reduced to 2.6%, reflecting a 0.2% decrease from June estimates.
In its statement, the Federal Reserve acknowledged that while inflation is moving closer to the 2% target, it remains “somewhat elevated.” The Fed’s goal is to achieve maximum employment and stable inflation at 2% in the long run. The Committee expressed confidence that inflation is on a sustainable path towards this target, and they believe the risks to achieving these objectives are balanced.
Job Market Remains Strong
Federal Reserve officials revised their unemployment rate forecast for this year, raising it from 4% to 4.4%. Powell expressed optimism that the Fed can maintain a strong labor market while adjusting policy rates. He reiterated that the current job market is not placing inflationary pressure on the economy.
The Fed’s statement also mentioned that the Committee is confident the risks to employment and inflation are under control.
A Flexible Approach Moving Forward
Powell stated that the Federal Reserve will not follow a predetermined path and will instead evaluate future decisions based on data. He clarified that the recent 50 bps cut should not be seen as setting a new course for the Fed’s policy. The Fed will continue to monitor new data before making any further decisions.
“Our policy stance will help sustain the strength of our economy and labor market while allowing for continued progress on inflation as we move towards a more neutral stance,” Powell said. “We are not locked into a preset path.”
The rate cut marks a significant shift in US monetary policy, signaling that the Fed is willing to adapt to changing economic conditions as it works to balance economic growth and inflation control.
This decision comes at a time when inflationary pressures remain a concern for both businesses and consumers, and further rate cuts could provide additional relief to the economy. The Fed’s focus on a flexible future suggests that more changes in interest rates could occur as the economic outlook evolves.
Update
JPMorgan: “In the past 40 years, the U.S. Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high. Each time, the market was higher a year later, with an average return of about 15%.”
Fitch: Economists anticipate a significant slowdown in U.S. growth for 2025, along with a series of interest rate cuts extending into 2026.
Bank of America now predicts that the Federal Reserve will reduce interest rates by 75 basis points in the fourth quarter of 2024. Earlier, they had expected two 25 basis point cuts.
This new forecast comes after the Fed recently cut rates by 50 basis points. Fed Chair Jerome Powell explained that this decision is part of their effort to keep unemployment low as inflation slows down.
Bank of America also predicts that the Fed will lower rates by another 125 basis points in 2025, bringing the final interest rate to between 2.75% and 3.00%. Meanwhile, other major firms like Goldman Sachs and Citigroup are still expecting smaller rate cuts.
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