The Federal Reserve Lowers Interest Rates for the First Time Since 2020

For the first time in over four years, the Federal Reserve has moved to cut borrowing costs to boost the economy and prevent rising unemployment.

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The Federal Reserve Takes a More Aggressive Approach
The Federal Reserve’s Balancing Act

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On Wednesday, the Federal Reserve cut the federal funds rate by 50 basis points to a range between 4.75% and 5%. This marked the first rate cut since March 2020, signaling a strategic shift after maintaining the highest interest rates in two decades for 14 months. Federal Reserve officials hinted at the rate cut in advance, but forecasters debated whether the reduction would be 25 or 50 basis points.

With inflation nearing the Fed’s target of 2%, policymakers in the Federal Open Market Committee (FOMC) are shifting their strategy away from aggressive inflation-fighting to sustaining the labor market.

Fed officials anticipate further cuts in the coming months, with an additional 50 basis point reduction expected in their next two meetings, according to a survey of committee members released alongside Wednesday’s policy announcement.

The Federal Reserve Takes a More Aggressive Approach

By opting for the larger of the two proposed rate cuts, Fed officials signaled that inflation was low enough, and risks to the labor market significant enough, to justify a more forceful reduction. The central bank’s “dual mandate” from Congress requires using monetary policy to maintain low inflation while preventing severe unemployment. The FOMC stated, “The committee has gained more confidence that inflation is sustainably moving toward 2%, and judges that risks to achieving its employment and inflation goals are roughly balanced.” It also highlighted that the economic outlook remains uncertain, with attention to risks on both sides of its dual mandate.

Lowering the federal funds rate puts downward pressure on mortgage rates, credit cards, auto loans, and other forms of credit, encouraging borrowing and spending by businesses and consumers. Fed officials must balance the need to stimulate the economy against the risk of reigniting high inflation, which disrupted the economy and household budgets following the pandemic.

The Federal Reserve’s Balancing Act

The Fed’s rate-hiking campaign, which began in March 2022, aimed to slow the economy and rein in inflation. By August, consumer prices had risen 2.5% year-over-year, down from the 9.1% annual inflation rate in June 2022—the highest level in over 40 years.

Taming inflation came at a cost to the economy: higher interest rates made mortgages unaffordable for many potential homebuyers. Of particular concern to the Fed, employers have slowed hiring amid rising borrowing costs for business loans and more consumers struggling to pay off credit card debt.

The unemployment rate rose to 4.2% as of August, up from 3.4% in January, which had been tied for the lowest level in 50 years. While unemployment is not high by historical standards, its rapid rise has triggered a reliable warning that a recession may be imminent. Not all policymakers agreed with the decision: Federal Reserve Governor Michelle Bowman voted against the 11 other committee members, preferring a smaller 25 basis point cut, breaking the FOMC’s streak of unanimous votes for the first time since June 2022.

The Federal Reserve Lowers Interest Rates for the First Time Since 2020

The Federal Reserve Lowers Interest Rates for the First Time Since 2020

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