WASHINGTON--The U.S. central bank on Wednesday kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction that Federal Reserve Chair Jerome Powell said was meant to show policymakers' commitment to sustaining a low unemployment rate now that inflation has eased.
"We made a good strong start and I am very pleased that we did," Powell said at a press conference after the Fed, noting its increased confidence that the country's bout with high inflation was over, reduced its benchmark policy rate by 50 basis points to the 4.75%-5.00% range. "The logic of this both from an economic standpoint and from a risk management standpoint was clear." So clear in fact that Powell, who has championed policy-by-consensus since becoming Fed chief in 2018, saw the first dissent from a Fed governor since 2005 when Michelle Bowman voted against the decision in favor of a smaller quarter-percentage-point rate cut - evidence some analysts said of his motivation to start the Fed's easing cycle in a compelling way.
Powell called the move a "recalibration" to account for the sharp decline in inflation since last year; he noted that the economy remained strong but the central bank wanted to stay ahead of and stave off any weakening in the job market; analysts saw a nod to what has been an overarching aim of his to avoid unnecessarily trading higher unemployment to reach the central bank's 2% inflation target. "A soft landing is within reach, which would seal his legacy as Fed Chairman," said Diane Swonk, the chief economist at KPMG. In addition to approving the half-percentage-point cut on Wednesday, Fed policymakers projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year, and half of a percentage point in 2026, though they cautioned that the outlook that far into the future is necessarily uncertain.
The move marks a significant pivot in U.S. monetary policy and a recognition of the Fed's growing comfort with inflation continuing to ease to its target. It is currently about half a percentage point above it. Despite coming only about seven weeks before the U.S. presidential election, the Fed's policy decision elicited a fairly muted reaction, initially at least, from the presidential candidates. Vice President Kamala Harris, the Democratic presidential candidate, called the rate cut "welcome news" for Americans. "I know prices are still too high for many middle-class and working families," she said in a statement.
Republican nominee Donald Trump, who as president first appointed Powell to lead the Fed, said the size of the cut suggested the economy may be in trouble. "To cut it by that much, assuming they're not just playing politics, the economy would be very bad," Trump told reporters. Powell, however, said the economy remained strong, with many job market indicators like unemployment claims and even the current 4.2% unemployment rate not at worrying levels. But he nodded to the same issues economists and analysts raise with inflation: That it takes time for changes in monetary policy to have an impact and that, between anecdotal information from companies and slowed hiring rates, officials felt they needed to preempt further labour market weakness just as others have argued for fast action to preempt inflation. "There is thinking that the time to support the labour market is when it is strong, and not when you begin to see layoffs," Powell said.
The Fed had kept its policy rate in the 5.25%-5.50% range since last July, when it ended an 18-month rate-hike campaign that was meant to control a surge in inflation, which soared in 2022 to a 40-year high. Powell declined to declare victory on that front, but he did say inflation is now near the Fed's 2% goal, and labour conditions are consistent with the central bank's other goal of maximum employment.
