The Blubber

With the job market and inflation showing signs of easing, the Federal Open Market Committee (FOMC) of the central bank opted to reduce its key overnight borrowing rate by 50 basis points, or half a percentage point, aligning with recent market expectations that had shifted from anticipating a smaller cut.

Excluding the emergency rate cuts during the Covid pandemic, the last time the FOMC implemented a half-point reduction was during the global financial crisis in 2008.

This adjustment brings the federal funds rate to a range of 4.75% to 5%. While this rate primarily influences short-term borrowing costs for banks, it also impacts various consumer products, including mortgages, auto loans, and credit cards.

Alongside this reduction, the committee indicated through its “dot plot” that it anticipates another 50 basis points of cuts by year-end, in line with market predictions. The individual projections from officials suggest an additional full percentage point in cuts by the end of 2025, along with a half-point reduction in 2026. Overall, the dot plot indicates the benchmark rate could decrease by about 2 percentage points beyond Wednesday's decision.

“The Committee is increasingly confident that inflation is moving sustainably towards the 2 percent target and believes the risks to achieving its employment and inflation goals are roughly balanced,” the statement following the meeting said.

The decision to lower rates was made “considering progress on inflation and the balance of risks.” Notably, the FOMC vote was 11-1, with Governor Michelle Bowman advocating for a quarter-point cut.

“We aim to restore price stability without causing a significant rise in unemployment, which has often accompanied past inflation issues. Today's action reflects our strong commitment to achieving that objective,” Chair Jerome Powell stated at a post-meeting news conference.

Market activity was volatile after the announcement, with the Dow Jones Industrial Average initially rising by as much as 375 points before settling down as investors processed the implications for the economy.

The committee acknowledged that “job gains have slowed, and the unemployment rate has increased, yet remains low.” FOMC officials revised their projected unemployment rate for this year to 4.4%, up from the previous estimate of 4% made in June, and lowered the inflation forecast to 2.3% from 2.6%. For core inflation, the committee adjusted its projection to 2.6%, a reduction of 0.2 percentage points from June.

The committee anticipates that the long-term neutral rate will hover around 2.9%, a figure that has risen as the Fed has struggled to bring inflation down to 2%.