Fed Cuts Interest Rates by Half Point for the First Time in Years: Impact on You

The Federal Reserve has ended a four-year streak by cutting its benchmark interest rate by half a percentage point, setting it at 4.75-5.0 percent. This notable decision indicates that the US central bank feels it is making progress in the battle against inflation, shifting its focus towards sustaining a robust job market.

This rate cut could lead to reduced borrowing costs for consumers and businesses ahead of the upcoming presidential election in November. In a statement, the Federal Open Market Committee of the Fed declared, “The Committee seeks to achieve maximum employment and inflation at the rate of two percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward two percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

Previously, the Fed held its benchmark policy rate steady within the range of 5.25-5.5 percent for 14 months. This period is longer than three of the last six instances where the Fed maintained rates but shorter than the duration before the 2007-2009 financial crisis.

As the meeting drew closer, uncertainty surrounded how significant the rate cut would be. Typically, adjustments are made in quarter-point (0.25%) increments, yet many Wall Street traders and some economists anticipated the announced half-point cut.

With inflationary pressures easing, the Fed now seeks to stabilize a cooling job market, aiming for a delicate “soft landing” that would lower inflation without triggering a recession. The expressed half percentage point reduction reflects the Fed’s confidence in sustaining economic growth while addressing the post-pandemic inflation that has significantly impacted consumer prices in recent years.

Economists suggest that this week’s decision marks the beginning of a series of rate cuts that could continue into the next year. As a result, borrowing costs for mortgages, auto loans, credit cards, and business loans should decline over time. Both businesses and consumers would be able to refinance existing debts at more favorable rates.

Theoretically, increased business spending could enhance stock prices, which have already reached record highs. In a press conference following the announcement, Federal Reserve Chair Jerome Powell stated that the labor market “has cooled from its formerly overheated state” and that inflation has decreased significantly.

“Our patient approach over the past year has paid dividends,” Powell noted, adding that “the upside risks to inflation have diminished, and the downside risks to unemployment have increased.” He explained that this recalibration would support the economy’s and labor market’s resilience, fostering further progress on inflation control.

Despite a thriving stock market, strong economic growth, and low unemployment rates, public sentiment regarding the economy remains pessimistic due to high interest rates and increased retail prices across various consumer spending areas, including groceries and travel. This financial strain has provided a potent talking point for former President Donald Trump as he campaigns against Vice President Kamala Harris, linking her directly to President Joe Biden’s record and challenging her claims of generational change and economic capability.

Harris has responded by criticizing Trump’s proposal to impose high tariffs on imported goods, which would lead to increased costs for consumers and further strain American wallets. In her campaign statement, she said, “While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down. I understand prices are still too high for many middle-class and working families, and my top priority as President will be to lower the costs of everyday needs like health care, housing, and groceries.”

On Capitol Hill, Republican Speaker Mike Johnson commented, “That’s welcome news for consumers. It feels a little—the timing is a little suspect.” When asked for clarification, he responded, “Right on the eve of an election? I don’t know, count me as curious about it, but look, it’s welcome news for consumers. We’ll take it.”

Fed officials maintain that inflation has largely been controlled, with rates falling from a peak of 9.1 percent in June 2022 to 2.5 percent in August, just above the Fed’s target of 2 percent. In response to soaring prices, the central bank had raised its key interest rate eleven times in 2022 and 2023 to a two-decade high of 5.3 percent, aiming to constrain borrowing and spending and cool down the economy.

This strategy has resulted in a slowdown in wage growth, mitigating one source of inflationary pressure. Additionally, decreasing oil and gas prices suggest that inflation may cool further. Consumers have begun resisting high prices, forcing some retailers to offer discount deals to appease customers outraged by post-pandemic pricing.

Following several years of solid job creation, hiring has slowed, and unemployment rose from its 50-year low of 3.5 percent in April 2023, to 4.2 percent. While a rise in unemployment traditionally points to further rate increases, Fed officials believe that much of this shift stems from new labor market entrants, such as immigrants and recent graduates, rather than layoffs or firings.

In anticipation of Wednesday’s rate cut, borrowing rates had already begun to decline. The average 30-year mortgage rate fell to 6.2 percent last week, down from a peak of 7.8 percent 18 months ago.

Source: Associated Press