Finally! Federal Reserve Cuts Interest Rates by 0.5%
Published On: September 19th, 2024
In a significant monetary policy shift, the Federal Reserve cut its benchmark interest rate by 0.5% on September 18, 2024. This is the Fed’s first rate reduction since 2020, dropping the federal funds rate to a target range of 4.75%-5.0%. The move signals a pivot from inflation control to supporting a slowing economy and cooling job market.
- Rate cut: 0.5% reduction, lowering the federal funds rate to 4.75%-5.0%
- Inflation: Projected to reach 2.3% by the end of 2024, down from earlier forecasts
- Unemployment: Expected to rise to 4.4% in 2024, up from 4.0%
- GDP growth: Forecasted at 2.0% for 2024, with similar growth in 2025 and 2026
The decision to cut rates comes after a series of hikes aimed at taming inflation, which had peaked above 9% in mid-2022. With inflation now nearing the Fed’s 2% target, and economic growth showing signs of deceleration, the central bank has shifted its focus to maintaining stability in the labor market. The job market has softened, with job creation slowing in recent months, prompting concerns that high interest rates might further dampen employment growth.
Fed Chair Jerome Powell emphasized that while inflation has moderated, the economy still faces challenges, particularly in the labor market. He noted that the rate cut is not an attempt to “catch up” but rather a preemptive move to prevent a significant economic downturn. Despite the reduction, the Fed signaled additional cuts could be on the horizon for later this year and into 2025.
What this means for the economy
The rate cut is expected to have mixed effects on various sectors. Borrowers stand to benefit as lower interest rates translate to cheaper mortgages, auto loans, and credit card rates. On the flip side, savers may see a reduction in returns on high-yield savings accounts as banks adjust their interest offerings in response to the Fed’s actions.
The stock market initially reacted positively to the news, with indices climbing before pulling back as investors digested the implications of future rate cuts. While rate reductions typically boost market sentiment, concerns about an economic slowdown have tempered some of the optimism.
Looking ahead, insiders and analysts expect the Fed to continue easing monetary policy, with at least two more cuts projected by the end of 2024. The central bank’s economic projections suggest a cautious approach as inflation continues to decline and the job market adjusts. However, with unemployment expected to rise slightly, some experts are concerned that aggressive rate cuts could slow growth more than anticipated.
The Federal Reserve’s decision to cut interest rates marks a significant shift in its monetary policy, reflecting concerns over a cooling economy and slowing job market. While borrowers may see relief, savers and investors face uncertainty as the economy adjusts to the new interest rate environment. How the broader economy reacts to these cuts will depend on inflation trends and labor market performance in the coming months, with more adjustments likely on the horizon.