US Federal Reserve Slashes Rates by 50 bps: 5 Key Takeaways
In a historic move, the US Federal Reserve lowered its benchmark interest rate by 50 basis points (bps) on Wednesday, marking the first rate cut in four years. After maintaining rates at a 23-year high for 14 consecutive months, this sovdecision signals a pivotal shift in the Fed's approach to managing inflation and economic growth.
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US Fed slashes interest rates by 50 bps in first cut since 2020
1. A Historic Cut Amid Cooling Inflation
For the first time since 2020, the Fed slashed interest rates, recognizing that inflation has moderated from its peak of 9.1% in June 2022 to 2.5% in August 2024. This reduction reflects the Fed’s belief that inflation is gradually moving towards its target of 2%, although risks remain due to ongoing geopolitical tensions and uncertain economic conditions.
2. More Rate Cuts Expected Through 2026
The Fed’s rate cut was not a one-time adjustment. Policymakers signaled that they expect to cut rates by another 50 bps before the end of 2024, with further reductions projected in the coming years. The Fed’s projections outline a potential full percentage point cut in 2025 and another half-percentage point cut in 2026.
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3. Revised Economic Forecasts: Inflation and Growth Outlook
The Fed also updated its economic projections, revealing a more optimistic outlook for inflation. Policymakers now expect inflation to fall to 2.3% by the end of 2024, slightly lower than previous estimates. However, they don’t foresee inflation reaching their long-term target of 2% until 2026. Meanwhile, the US economy is forecast to grow by 2.1% this year and 2% in 2025, maintaining steady growth despite concerns about a potential recession. The unemployment rate is projected to rise modestly to 4.4% by the end of 2024, reflecting some softening in the labor market.
4. Slowing Pace of Quantitative Tightening
Alongside the rate cuts, the Fed announced a slowdown in the pace of its balance sheet runoff, a process known as quantitative tightening (QT). Since June 2022, the Fed has been shrinking its holdings of Treasury bonds and mortgage-backed securities to reduce excess liquidity in the financial system. Moving forward, the Fed will allow $25 billion in Treasury bonds to roll off its balance sheet each month, down from $60 billion.
5. Mixed Reaction on Wall Street
The markets reacted cautiously to the Fed’s decision, with major stock indices closing slightly lower. The Dow Jones Industrial Average fell 0.25%, the Nasdaq Composite dropped 0.31%, and the S&P 500 slipped 0.29% after an initial rally. The US dollar also experienced some volatility, briefly weakening before gaining 0.07% against a basket of major currencies.
Conclusion: Navigating a New Monetary Path
The US Federal Reserve’s decision to cut rates by 50 bps marks a crucial turning point in its battle against inflation. While inflation is trending downward, the Fed remains cautious, signaling that more rate cuts may be necessary to balance economic growth and price stability. For investors, businesses, and policymakers alike, the implications of this shift are profound, as the global financial landscape continues to evolve. Staying informed and prepared for the Fed’s next moves will be essential in navigating the economic uncertainties ahead.
Also Read: Fed Decision Uncertainty Reaches Highest Level Since 2007