The US Federal Reserve reduced interest rates on Wednesday for the first time since 2020, opting for a substantial cut of half a percentage point.
The benchmark rate now sits between 4.75% and 5 %, and an additional half-point cut is expected by the end of 2024.
The Fed now has “greater confidence” in the decline of inflation, revising its inflation forecast down to 2.3% by the end of 2024 and 2.1% by the end of 2025, compared to previous predictions of 2.6% and 2.3% respectively.
Inflation on track, unemployment forecast slightly up
The target inflation rate of 2.0% is expected to be reached by 2026.
Unemployment forecasts have been revised upwards to 4.4% for this year and 2025, up from the previous forecasts of 4.0% and 4.2%.
GDP growth for 2024 is expected to be 2.0%, slightly down from the earlier projection of 2.1%.
The previous rate change by the Fed was in July 2023, when it raised rates to a range of 5.25% to 5.50%, the highest level since 2001. Rates were maintained at this record high for over a year to make sure inflation returned towards the 2% target.
Rate cut aimed at boosting households' purchasing power
With increasing confidence in the trajectory of inflation, the Fed decided to lower rates to reduce borrowing costs and stimulate the economy. The rate cut aims to boost the purchasing power of US households, which have been strained by high inflation and expensive credit.
In June, the Fed had anticipated only a quarter-point rate cut in 2024, but the job market has since slowed more than expected, renewing recession fears.
Fed Chair Jerome Powell had indicated in late August that “the time has come” to ease monetary policy. Now that inflation is gradually subsiding, the Fed seeks to prevent unemployment from rising by lowering interest rates.
Meanwhile, the European Central Bank (ECB) cut its rates on Thursday for the second time in three months.
