Aggressive rate cut aims to balance inflation and employment, says Powell

Fed Chair expressed his satisfaction with 50 basis point cut emphasising it was economically and strategically sound

WASHINGTON:

The US Federal Reserve initiated a series of anticipated interest rate cuts on Wednesday with a larger-than-usual half-percentage-point reduction. Fed Chair Jerome Powell stated that the move signalled policymakers' commitment to maintaining low unemployment now that inflation has decreased.

Powell expressed satisfaction with the decision, emphasising that it was economically and strategically sound.

The Fed lowered its benchmark interest rate by 50 basis points to a range of 4.75%-5.00%. This marked the first dissent from a Fed governor since 2005, as Michelle Bowman voted for a smaller, quarter-percentage-point cut, highlighting Powell's desire to start the easing cycle decisively.

Powell referred to the rate cut as a "recalibration," acknowledging the sharp fall in inflation since the previous year. He stressed that the economy remains strong, but the Fed sought to avoid any potential weakening in the job market. Analysts recognised this as Powell's effort to prevent rising unemployment while pursuing the central bank's 2% inflation target.

Alongside the rate cut, Fed policymakers projected further reductions this year, next year, and in 2026, though they acknowledged uncertainty over long-term outcomes.

Although the rate cut came shortly before the US presidential election, reactions from political candidates were muted. Vice President Kamala Harris welcomed the decision, while Republican nominee Donald Trump suggested it indicated potential economic trouble.

Powell, however, maintained that the economy remained robust, with no signs of significant concern in the job market, but he noted the need to act preemptively to support the labour market before weaknesses emerged.

The Fed had previously kept its policy rate unchanged since July following an 18-month rate-hike campaign to combat inflation, which had reached a 40-year high in 2022.

While Powell stopped short of declaring victory over inflation, he noted that it was now approaching the Fed's 2% target, and labour conditions were in line with the goal of maximum employment. Financial markets reacted initially with gains, but US stocks eventually fell. Traders now anticipate further easing, with the policy rate expected to drop to the 4.00%-4.25% range by year-end.

US stocks closed with modest losses on Wednesday, well off their intraday highs, after the Federal Reserve cut interest rates. Prior to the Fed announcement, the S&P 500 oscillated between modest gains and losses. The benchmark index rose as much as 1% after the announcement before paring gains and finally closing lower. The Dow and S&P 500 hit intraday highs before weakening.

The Dow Jones Industrial Average fell 103.08 points, or 0.25%, to 41,503.10, the S&P 500 lost 16.32 points, or 0.29%, to 5,618.26 and the Nasdaq Composite lost 54.76 points, or 0.31%, to 17,573.30.

Inflation is projected to fall closer to the Fed’s target, while unemployment is expected to remain stable. Economic growth is forecast to be 2.1% in 2024, consistent with previous projections.