Nick Timiraos, chief economic correspondent for the Wall Street Journal, looks ahead to the Federal Reserve’s possible interest rate cut and its expected impact on the U.S. economy.
The The US Federal Reserve announced a long-awaited interest rate cut on Wednesday, cutting its benchmark rate by 50 basis points from its highest level in 23 years, as the central bank reduced borrowing costs following progress in the fight against inflation.
The Fed’s first rate cut since March 2020 lowers the federal funds rate to a range of 4.75% to 5%.
Since July 2023, interest rates have been in a range of 5.25 to 5.50 percent, the highest since 2001, as the central bank monitored economic data for signs that stubborn inflation was heading toward its two percent target.
There have been signs in recent months that inflation is moving toward the Fed’s target, even if the latest data showed it is not quite there yet. Inflation slowed to 2.5% on an annual basis in August, down from 2.9% the previous month and well below the peak of this inflation cycle of 9.1% in June 2022.
US ECONOMISTS WARN THE FED AGAINST PRICE RISES AHEAD OF THE EXPECTED INTEREST RATE DECISION: “BE CAREFUL”
Fed Chairman Jerome Powell announced that the central bank would cut interest rates for the first time in four years. (Photo by ROBERTO SCHMIDT/AFP via Getty Images / Getty Images)
Jerome Powell, Chairman of the US Federal Reserve previously signaled that the central bank does not intend to wait until inflation reaches two percent before cutting interest rates.
Powell said in July: “Anyone waiting until inflation has fallen all the way to 2 percent has probably waited too long. Because the current tightening, or the magnitude of the tightening, still has effects that are likely to push inflation below 2 percent.”
Inflation rises by 2.5% in August, less than expected
A Slowdown in hiring has raised concerns that the labor market and economy could potentially slide into recession, leading to speculation that the Fed might opt for a 50 basis point interest rate cut.
At the beginning of a rate-cutting cycle, the central bank typically opts for a smaller cut of 25 basis points. However, it has also made larger cuts when economic uncertainty is greater.
Most recently, major interest rate cuts of 50 basis points were made in March 2020 at the start of the Covid-19 pandemic, in September 2007 in the midst of the real estate crisis, and in January 2001 when the dot-com bubble burst.
Studies show that the Fed’s actions in the fight against inflation were clearer to the markets than words
The US Federal Reserve had previously signaled that policymakers would not wait until inflation reached two percent before cutting interest rates. (Photographer: Ting Shen/Bloomberg via Getty Images / Getty Images)
Markets had fully priced in a 25 basis point rate cut ahead of the Fed’s decision on Wednesday, although traders increasingly expected a 50 basis point rate cut by the Fed ahead of the announcement.
According to the CME FedWatch tool, the probability of a 50 basis point cut rose from 25 percent a month ago to 64 percent the day before the Fed’s decision.
Wednesday’s rate cut decision is likely to be the first in a series of moves to lower interest rates. Before the Fed’s announcement, markets had expected the Fed to announce further rate cuts at its meetings in the coming months, as the CME FedWatch tool sees a probability of just over 50% that rates will be cut to a range of 4.5% to 4.75% in November.
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“The markets got what they wanted – a first big Fed cut,” said Chris Larkin, managing director of trading and investments at Morgan Stanley’s E*TRADE. “Aside from how well or poorly the economy does, that could depend largely on what the Fed has to say about how fast and how far it sees rates falling from here.”
The next Federal Reserve meeting will be held on November 6-7, right after Election Day on November 5, while the final meeting of the year will be on December 17-18.
