The Fed Announces First Jumbo Interest Rate Cut in 4 Years for US

• The Federal Reserve has reduced interest rates by 50 basis points.
• This marks the first rate cut in more than four years.
• The decision comes as a response to a softening job market.

A substantial interest-rate cut has finally taken place.

On Wednesday, the Federal Open Market Committee declared a 50 basis points reduction in interest rates. This decision marks the first rate cut since March 2020.

This action signals a shift from the Federal Reserve’s aggressive stance on combating inflation during the pandemic. Fed Chair Jerome Powell previously indicated at a speech in Jackson Hole, Wyoming, that it was time for a policy adjustment, suggesting the economy was approaching the Fed’s 2% inflation target.

Recent data shows that the consumer price index, which tracks inflation, rose by only 2.5% year-over-year in August, a decrease from July’s 2.9%. Furthermore, the unemployment rate saw a slight decline in August, providing the necessary information for the Fed to justify lowering rates.

Market predictions indicate that a rate cut was anticipated, with focus on the magnitude of the decrease. According to CME FedWatch, a 50-basis-point cut was expected, aligning with the Fed’s announcement.

Economists and Democratic lawmakers have long advocated for a rate cut of at least 50 basis points. Skanda Amarnath, executive director of the advocacy group Employ America and a former Fed economist, emphasized the urgency of acting swiftly. He argued that it’s crucial to take action early rather than wait for recession indicators to become evident.

Amarnath expressed concern regarding the potential inadequacy of a 50 basis points cut if the economy worsens further. Democratic Senators Elizabeth Warren, John Hickenlooper, and Sheldon Whitehouse even urged Powell to consider a deeper cut of 75 basis points in a letter sent before the announcement.

They warned that excessive caution in rate cuts could unnecessarily jeopardize the economy’s stability, increasing the likelihood of entering a recession.

While Powell encountered criticism from various stakeholders for delaying rate cuts, he consistently defended his approach, stressing the importance of waiting for comprehensive data. He stated that prematurely reducing rates might require the Fed to increase them again, creating further economic instability.

The future of rate cuts remains uncertain, and the effects of this reduction might take time to be felt by the American public. Specifically, there may be delays in the housing and automotive sectors, as one rate cut is unlikely to create immediate relief. Moreover, individuals with credit card debts, which currently carry high interest rates, may not see prompt alleviation.

Over the past decade, credit card interest rates have surged nearly double to 22.8%, while delinquencies are on the rise. In contrast, the average rates for 30-year fixed mortgages stand at 5.5%.

Overall, this interest-rate cut is viewed as a positive indicator concerning the direction of the U.S. economy.

Bharat Ramamurti, a senior advisor for economic strategy at the American Economic Liberties Project, conveyed optimism regarding the Fed’s decision, stating that it signals an end to the relentless battle against inflation.