Federal Reserve officials on Sept. 18 approved a half-point rate cut — the first cut in more than four years — as inflation shows further signs of cooling and the job market softens.
The Federal Open Market Committee lowered the federal funds rate to a range of 4.75% to 5% following its two-day meeting.
“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in the context of moderate growth and inflation moving sustainably down to 2%,” Fed Chair Jerome H. Powell said at a news conference.
Fed officials have “gained greater confidence that inflation is moving sustainably toward 2% and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the committee said in a statement.
The committee also signaled further rate cuts this year. Its median projection for the federal funds rate at the end of 2024 is now 4.4%, down from a projected 5.1% in June. The committee projects the funds rate to drop to 3.4% at the end of 2025 and 2.9% at the end of 2026.
Powell said the committee is not “in a rush” to further cut rates and has no preset course; instead, it will make decisions meeting by meeting based on incoming data.
Fed officials have had to navigate myriad challenges in recent years, notably a pandemic and soaring inflation. In March 2020, with the economy essentially shut down, the committee quickly cut the funds rate to zero. Then from March 2022 through July 2023, as inflation spiked — the consumer price index peaked at an annualized 9.1% in June 2022 — it raised the funds rate 525 basis.
Of late, inflation has come closer in line with the Fed’s 2% target.
The Bureau of Labor Statistics reported Sept. 11 that the CPI rose 2.5% year-over-year in August — the smallest 12-month increase recorded since February 2021 — and below the 2.9% figure recorded in July.
Moreover, the core personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 2.6% year over year in July.
The committee's median projection for core PCE inflation by the end of 2024 is now 2.6%, down slightly from 2.8% in June. The committee sees core PCE inflation decreasing to 2.2% by the end of 2025 and to 2% by the end of 2026.
Also, the unemployment rate in August was 4.2%, slightly below the 4.3% in July, but up from 4.1% in June. The committee forecasts the unemployment rate to rise to 4.4% by the end of the year and remain at the level through 2025.
Ashish Shah, global co-head and CIO of public investing at Goldman Sachs Asset Management, said in a statement that the 50-basis-point cut signals the Fed “shifting into a ‘back-to-the-business-cycle’ mode. With inflation easing, the labor market is expected to dictate the pace of future Fed adjustments.”
After the Fed’s announcement, Greg Davis, president and CIO at Vanguard Group, urged investors in a statement to “bear in mind that the rate-cutting cycle can lead to market volatility, so it’s important for investors to remain focused on their long-term objectives.”
Davis said the market volatility experienced over the summer strengthened the case for bonds and “should serve as a good reminder for investors about the value of a diversified portfolio and a healthy allocation to fixed income. Despite the bond market pricing in a soft landing, bonds continue to offer attractive yields, both nominally and after adjusting for inflation. Furthermore, if recession risks increase, we’d expect bond prices to rise as yields fall further.”
Eleven of the committee’s 12 members approved the half-point cut. Fed Board Governor Michelle Bowman favored a quarter-point cut and dissented.
The Fed’s next meeting is Nov. 6-7.
