[Source – edition.cnn]
The Federal Reserve on Wednesday delivered a significant blow to inflation, announcing a half-point cut in interest rates. This marks the first rate reduction since March 2020 and comes as a relief to borrowers across the nation. The move is expected to lower borrowing costs on everything from mortgages to credit cards.
The aggressive rate cut is a testament to the Fed’s success in tackling the historic inflation surge that had pushed rates to a 23-year high. President Joe Biden acknowledged the central bank’s achievement, stating that “we just reached an important moment.”
Half-Point Cut Signals Urgent Relief for US Economy
While the rate cut was widely anticipated, stocks experienced some volatility following the announcement. The decision to cut by half a point, rather than a quarter-point, signals the Fed’s urgency in providing the US economy with swift relief from elevated borrowing costs.
Fed Chair Jerome Powell assured the public that the central bank is not behind the curve and that the aggressive rate cut is a sign of its commitment to responding to the economy’s needs. However, Fed Governor Michelle Bowman expressed concerns about lingering price pressures and dissented from the decision, advocating for a smaller quarter-point cut. This marked the first dissent from a Fed governor since 2005.
Federal Reserve officials have indicated that they plan to implement more rate cuts before the end of the year, according to their latest economic projections. This is a significant shift from their previous forecast in June, which predicted only one rate cut in 2024. Additionally, central bankers anticipate a slight increase in unemployment this year, rising to 4.4% from the current rate of 4.2%.
Fed Forecasts More Rate Cuts, Unemployment Rise
Despite the Fed’s aggressive actions to combat inflation, the central bank’s efforts seem to be paying off. Inflation has significantly declined from its 40-year highs seen in the summer of 2022, and the US economy has avoided a recession. This progress is attributed not only to higher interest rates but also to the economy’s ongoing recovery from pandemic disruptions.
While the Fed has successfully managed to tame inflation without sacrificing jobs, concerns remain about the future of the labor market. Some economists believe that the Fed should have started cutting rates more aggressively to avoid the risk of a potential recession. The unemployment rate has risen relatively quickly over the past year, and there is a concern that it may continue to climb.
Achieving a soft landing, where inflation is reduced without a sharp increase in unemployment, is a rare feat. It has only happened once in modern history, in the mid-1990s. The Fed’s current efforts to navigate this delicate balance could potentially lead to a historic accomplishment.
