
The Federal Reserve took its first concrete step on Wednesday to start cutting interest rates, shifting its main priority from fighting inflation to protecting the job market.
The central bank cut its benchmark interest rate 0.5%, pulling down the cost to secure auto loans, finance businesses or carry credit card balances. It was the first rate cut since 2020, but not the last. Members of the Fed’s rate-setting committee, on average, expect to cut another 0.5% this year and a full percentage point next year. That is quicker than officials previously expected three months ago.
This transition into the interest-rate cuts marks a significant shift from the Fed’s two-and-a-half-year effort it has been putting into taming inflation. The central bank initiated rate increases in March 2022 to slow down demand and, subsequently, price stabilization. Last summer, interest rates had risen to 5.25% to 5.5%, the highest in more than 20 years.
While inflation is cooling, so, too, is the labor market. The latest rate cut follows a steep drop in the annual rate of inflation to 2.5% last month from 9.1% in June 2022.
We’re not declaring ‘Mission Accomplished,’ or anything like that,” Fed chairman Jerome Powell told reporters after the announcement. “But we are pleased with the progress we’ve made.
At the same time, job gains have slowed, and the unemployment rate has ticked up to 4.2%, making Fed officials nervous that strong interest rates could curtail economic growth unnecessarily.
“The U.S. economy is in a good place,” Powell said. “Our decision today is designed to keep it there.” Still, policymakers are uncertain about the future pace of rate cuts. For instance, committee member Michelle Bowman favored a more limited easing, supporting only a 0.25% rate cut on Wednesday. There’s also some disagreement among the committee members on just how much to cut rates next year.
While that is good news for borrowers, and could eventually help the economy, it probably will translate to lower returns for savers as online savings accounts and money market funds continue their slide downward.
The timing of the Fed’s action is politically sensitive, since it comes less than seven weeks before a presidential election in which economic strength is a pivotal issue for voters. Powell has said repeatedly that Fed decisions are not based on partisan politics. Our responsibility is to support the economy for the American people,” Powell said. “If we are successful, which we will be, the benefit to the American people will be quite great. We don’t let anyone, including the president, influence our decisions because once you start on that road, there’s really no stopping point.