Federal Reserve Cuts Interest Rates for First Time Since 2020

The United States Federal Reserve Board has announced a decrease in the Federal Funds Rate, the target interest rate at which commercial banks make and receive overnight loans and deposits, to a range of 4.75-5 percent. This marks a 50 basis point or 0.5 percentage point decrease from the previous 5.25-5.50 percent.

The decision to cut rates was anticipated by markets and analysts, although the magnitude of the decrease was larger than expected.

Economic Activity and Inflation

According to the Fed’s latest macroeconomic data, economic activity continues to expand at a significant pace. Job growth has slowed, and the unemployment rate has risen, but remains low. Inflation has made further progress towards the 2 percent target, although it remains relatively high.

The Fed has gained greater confidence that inflation is moving sustainably towards 2 percent and assesses that the risks to achieving employment and inflation targets are broadly balanced.

Future Adjustments

The financial institution will carefully monitor incoming data and changing views when considering further adjustments to the target range of the key interest rate, due to the presence of risks.

The decision was made by a majority of 11 votes to 1, and the Federal Reserve has indicated that it may cut interest rates again by the end of the year.

Historical Context

This is the first rate cut in the US since March 2020, when the Covid-19 pandemic was announced. Interest rates were then reduced to near zero to support the economy.

However, low interest rates and supply chain problems after the pandemic led to an increase in inflation, prompting the Fed to tighten its monetary policy. The rate rise began in March 2022 and reached its peak in July 2023, with the Federal Reserve raising interest rates to a 22-year high of 5.25-5.50%.