Fed decides to go big with 0.5% rate cut

In a move that seemed highly unlikely just a few weeks ago, the Federal Reserve has voted to lower its benchmark interest rate by 0.5%.

Eleven of 12 Federal Open Market Committee (FOMC) members supported the half-point reduction, which marked a bold departure from the central bank’s standard quarter-point moves.

It was also the first rate cut since the onset of the Covid crisis in early 2020 and the first half-point reduction since 2007.

In its official policy statement, the Fed expressed its confidence that inflation was moving toward its 2% target. Policymakers also indicated that the risks to achieving their dual mandate of price stability and full employment were roughly balanced.

The FOMC’s latest projections showed that most officials expect two additional quarter-point reductions in November and December. Officials expect rates to decline by a full percentage point in 2025 and half a percentage point in 2026.

If those forecasts hold, the federal funds rate will fall to a low of 2.75% by the end of 2026.

“We are committed to maintaining our economy’s strength,” Fed Chair Jerome Powell said in a news conference after the meeting.

“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained,” he said.

As Creditnews reported, the case for a jumbo-sized rate cut grew in the week leading up to the FOMC meeting. Before Wednesday, Wall Street futures markets said there was a more than 60% chance of a half-point reduction.

The move was the Fed’s boldest statement yet that it will not tolerate further weakness in the labor market.

A major pivot

The data-dependent Fed has been slow to adjust its stance on monetary policy, but that seems to have changed following the July FOMC meeting.

As the minutes of that meeting showed, “several” Fed officials saw a “plausible case” for reducing interest rates in July, but held off anyway.

Since the Fed’s last meeting, the pace of hiring in the U.S. economy has slowed even further as inflation reached a more than three-year low of 2.5%.

Although Fed officials never publicly committed to jumbo-sized rate cuts, there were tangible signs that policymakers were open to the idea.

For example, earlier this month, Atlanta Fed Bank President Raphael Bostic said keeping interest rates elevated could “inflict unnecessary pain and suffering” on Americans.

His colleague, Chicago Fed President Austan Goolsbee, said the possibility of a recession has replaced inflation as policymakers’ primary concern.

In a recent interview with CNBC, Goolsbee said the central bank’s priority should now be “not letting things turn into something worse.”

John Williams of the New York Fed agreed that cooling inflation and a slowing labor market meant it was “now appropriate to dial down the degree of restrictiveness” in monetary policy.

The FOMC’s next policy meeting is scheduled for Nov. 6-7.

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