In an unexpected move, he announced Federal Reserve Bank About a significant reduction in Interest rates By half a percentage point, the first such cut since the start of its battle against inflation, the decision reflects a shift in US monetary policy amid growing concerns about a slowing labor market.
The newspaper publishedThe EconomistThe British newspaper published a report highlighting the Federal Reserve’s decision to cut interest rates by half a percentage point, which was announced on September 18.
The newspaper said, in its report translated by “Arabi21”, that this decision is of great importance for two main reasons. First, this reduction is the first of its kind by the US central bank since it began raising interest rates in order to combat inflation, which means that it represents the beginning of a new phase of monetary easing. The reduction represents a bet by the Federal Reserve that inflation may soon become a thing of the past, which calls for taking measures to support the labor market. For the first time since 2005, a governor at the Federal Reserve Bank in Washington, DC, opposed this decision. Michelle Bowman, one of the governors, preferred to cut interest rates by only a quarter of a percentage point.
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When the Fed raised interest rates between early 2022 and mid-2023, it announced the size of each increase in advance. This time, however, there was uncertainty about the size of the cut. A week before the decision, market prices were indicating a roughly 65 percent chance that the Fed would cut rates by a quarter point, while the odds of a half-point cut were about 35 percent. As the day before the decision approached, prices had shifted to a 65 percent chance of a half-point cut. The fact that some investors, albeit a minority, still favored a smaller cut helps explain why stocks initially rose after the Fed opted for a larger cut.
The arguments for a half-point rate cut were based on several pillars, the paper noted. Crucially, the Fed feels confident it is on track to control inflation, with price increases slowing to an annual pace of 2.5 percent, close to the 2 percent target. With oil prices falling and rents rising more slowly, there is a good chance that inflation will fall further soon.
Meanwhile, the Fed’s concerns have shifted to the labor market. The current unemployment rate, at 4.2 percent, is low but about a full percentage point higher than it was early last year. Businesses have cut back on hiring. Fed Chairman Jerome Powell has framed the rate cut as a recalibration of monetary policy to reflect the declining risks of inflation and the rising risks of unemployment.
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The Fed’s rate cuts are a form of insurance, as they take months to have an impact on the economy. Given that delay, along with expectations that the economy will continue to slow, it makes sense for the Fed to make a bigger move now to preempt any potential weakness in the future. The central bank has been holding off on raising rates through 2022, and now hopes that starting with a bigger cut will help steer the economy toward a soft landing and avoid the recession that many analysts once thought was inevitable. “We don’t think we’re late, we think it’s timely,” Powell said. “But I think you can see it as a sign of our commitment not to be left behind.”
However, the Fed’s aggressive rate cut poses some risks. Despite some cracks in the labor market, the economy overall appears to be holding up well. In fact, resilient consumption is forecast to put the economy on track to grow at a 3 percent annual rate in the current quarter, well above most forecasts just a month ago. So cutting rates so aggressively against a strong economic backdrop could send the wrong signal to markets. However, the central bank has decided that this risk is manageable.
According to forecasts released on September 18, the median forecast of Fed officials shows that they could cut rates by another 1.5 percentage points by the end of next year. They could easily make smaller cuts if inflation proves more stubborn.
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Another risk is politics. The big rate cut, coming just before the presidential election, could draw criticism from Donald Trump as a sign that the Fed, a frequent target of his ire, is trying to help Kamala Harris. On the other hand, a quarter-point rate cut could invite accusations from Democrats that Powell was acting under pressure from Trump. Powell has long insisted that he ignores political pressure, but he may need to wear powerful noise-canceling headphones in the coming weeks.
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