Vaishali Prayag, News Editor
Interest Rate Cuts, FED. Photo//Shutterstock.
The US Federal Reserve (Fed) has reduced its key interest rate for the first time in over four years, making an aggressive move to lower borrowing costs. The Fed cut its benchmark rate by 0.5 percentage points, bringing it to a range of 4.75%-5%, a larger reduction than analysts had predicted.
Federal Reserve Chair Jerome Powell described the move as necessary to address rising concerns about the job market and ease borrowing costs for US consumers, who have been dealing with the highest interest rates in decades. “The labor market is in a strong place – we want to keep it there,” Powell said in defense of the decision.
This rate cut comes at a time when inflation has cooled, dropping to 2.5% in August, close to the Fed's 2% target. With inflation easing, the Fed has shifted focus to maintaining economic growth amid rising unemployment. The unemployment rate has climbed from 3.7% at the start of the year to 4.2%, and Fed projections now forecast further increases, with the jobless rate expected to reach 4.4% by the end of 2024.
Economic Relief for Borrowers
For many Americans, the rate cut is a welcome relief. Consumers have faced high borrowing costs for mortgages, car loans, and credit card debt due to the Fed's aggressive rate hikes since 2022, which aimed to cool the economy and combat soaring inflation.
Jennifer Heasley, a restaurant owner in Pennsylvania, has felt the impact firsthand. After using credit cards to expand her business, Heasley watched her interest rates soar, with one card charging her 21%. “My monthly payments have increased tremendously,” she said, adding that the rate cut is “a big deal” for her business.
Bold Action Amid Uncertainty
The Fed's decision follows rate cuts by central banks in Europe, the UK, and Canada. However, the size of the US cut took many by surprise, sparking questions about the Fed’s outlook. Some experts wonder what prompted such bold action despite the absence of an economic crisis.
Isaac Stell, an investment manager at Wealth Club, said the move suggests policymakers are “getting ahead of the curve” in anticipation of future risks. Nonetheless, Powell emphasized that he does not foresee a downturn, citing recent economic growth of 3% in the second quarter and strong retail spending.
Despite Powell’s optimism, the Fed has indicated further rate cuts may be on the horizon, with forecasts suggesting the key lending rate could drop another 0.5 percentage points by the end of the year, reaching 4.4%, and down to 3.4% by the end of 2025.
Markets React
Following the rate cut announcement, US stock markets initially surged, with the Dow Jones, S&P 500, and Nasdaq rising. However, by the end of the day, those gains had tapered off, leaving markets modestly lower.
The Fed's actions mark the start of what could be a period of lower borrowing costs, providing much-needed relief to businesses and consumers alike, while offering a glimpse into the central bank’s ongoing efforts to stabilize the US economy amidst changing conditions.
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