Federal Reserve Cuts Interest Rates For The First Time Since 2020

For the first time in more than four years, the Federal Reserve is moving to push down borrowing costs, aiming to bolster the economy and prevent unemployment from rising. 

The Federal Reserve cut its influential fed funds rate 50 basis points Wednesday to a range of 4.75% to 5%. The first rate cut since March 2020 marked a shift in strategy from the Fed, which had held its key interest rate at a two-deacde high for 14 months before Wednesday. Fed officials had signaled that the rate cut was coming, but there was a debate among forecasters on whether it would be a 25- and 50-point reduction.

With inflation falling and nearing the Fed’s goal of a 2% annual rate, policymakers on the Federal Open Market Committee are shifting their strategy away from inflation-fighting mode to preserve the job market.

Fed officials expect to make further cuts in the coming months, reducing the rate by an additional 50 basis points over their next two meetings, according to a survey of the committee’s members released Wednesday alongside the policy announcement.

Fed Opts For More Aggressive Approach

In choosing the larger of the two rate cut options on the table, Fed officials indicated inflation was running low enough, and the risks to the labor market great enough, to justify a more aggressive cut. The central bank’s “dual mandate” from Congress requires it to use monetary policy to keep inflation low while preventing severe unemployment.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the FOMC said in a statement. “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

The more central bankers lower the fed funds rate, the more downward pressure it puts on interest rates for mortgages, credit cards, auto loans, and other credit, encouraging borrowing and spending by businesses and individuals. Fed officials must balance the need to boost the economy against the risk of reigniting the high inflation that roiled the economy and household budgets in the wake of the pandemic.

The Fed’s Balancing Act

The Fed’s rate-hiking campaign, which began in March 2022, was meant to slow down the economy and quash inflation. As of August, consumer prices had risen 2.5% over the year, down from a 9.1% annual inflation rate in June 2022, the highest in more than 40 years.

Subduing inflation came at a cost to the economy: high interest rates have made mortgages unaffordable for many would-be homebuyers. Especially concerning for the Fed, employers have slowed down hiring amid higher borrowing costs for business loans and more consumers pinching pennies and struggling to repay credit card debt.

The unemployment rate rose to 4.2% as of August from 3.4% in January, which had been tied for a 50-year low. Although unemployment isn’t high by historical standards, it has risen fast enough to set off a typically reliable warning that a recession is imminent.

Not every policymaker was on board with the decision. Fed governor Michelle Bowman voted against the other 11 members of the committee, preferring a smaller cut of 25 basis points, breaking the FOMC’s stretch of unanimous voting for the first time since June 2022.