Fed cuts rates by 50bps in first easing move since pandemic

WASHINGTON: After a long gap of four years, the Federal Reserve enacted its first rate cut since the early days of the Covid-19 pandemic, reducing the key overnight borrowing rate by 50 basis points to a range of 4.75 per cent-5 per cent.

The move was made in response to moderating inflation and signs of weakening in the labour market.

The Federal Open Market Committee (FOMC) decision reflects confidence that inflation is moving towards the 2 per cent target, while acknowledging increased risks to employment and inflation goals.

This marks the most significant rate cut since the 2008 financial crisis, excluding emergency pandemic measures.

Key Highlights:

• The FOMC voted 11-1 in favour of the 50 basis point cut, with Governor Michelle Bowman advocating for a smaller 25 basis point cut.
• The Fed signaled another 50 basis points in rate cuts by year-end, with expectations for further reductions into 2025 and 2026, according to the dot plot projections.
• Despite a relatively strong economic backdrop, with the Atlanta Fed tracking 3 per cent GDP growth in Q3, concerns about the slowing labour market and persistently high inflation prompted the cut.
• The unemployment rate has ticked up to 4.2 per cent, while inflation projections have been revised down, with core inflation expected to reach 2.6 per cent.
• The Fed’s decision to cut rates follows similar moves by other central banks, including the Bank of England (BoE) and the European Central Bank (ECB).

Chair Jerome Powell emphasised the importance of restoring price stability while minimizing job losses.

Sparks volatility

The move sparked volatility in financial markets, with the Dow Jones initially jumping before easing as investors processed the broader economic implications.

The Fed also continues its quantitative tightening program, gradually reducing its $7.2 trillion balance sheet through bond roll-offs.

This rate cut sets the stage for ongoing debate over how aggressive future cuts should be, as the central bank navigates balancing inflation and employment goals.