US Federal Reserve cuts interest rates by 50 basis points as inflation shows signs of cooling

The US Federal Reserve has cut interest rates for the first time in four years amid signs that inflation is moderating and the nation’s labour market is weakening.

America’s central bank announced a sizeable cut of 50 basis points overnight — double the traditional 25 basis point reduction — to bring its key lending rate down to between 4.75% and 5%.

The rate now sits at its lowest level since March 2023 and will act as a benchmark for borrowing in the rest of the economy.

Labour market concerns

The decision is believed to reflect a new focus on bolstering a labour market that has shown signs of slowing down and comes just weeks before the much-anticipated presidential election.

The rates at which commercial banks lend to consumers and businesses will be affected, bringing down the cost of borrowing on everything from mortgages to credit cards.

The Fed said it expects further cuts at its final two meetings of the year, aiming for a lending rate of about 4.4% by year-end and about 3.4% by the end of 2025.

Rare dissenting vote

The Federal Open Market Committee (FOMC) — comprising 12 bank officials with the sole authority to vote on whether to raise, lower or maintain interest rates — voted 11-1 in favour of implementing the 50 basis point reduction.

Governor Michelle Bowman voted against the decision, favouring a more conventional quarter-point cut.

It is believed to be the first dissenting vote by a Federal Reserve governor in favour of a tighter monetary policy since 2005.

Inflation battle

The FOMC said it had come closer than ever to declaring victory over inflation.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2% and judges that the risks to achieving its employment and inflation goals are roughly in balance,” it said via statement.

“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by half a percentage point [and] will continue to carefully assess incoming data, the evolving outlook and the balance of risks.”

While the bank now believes inflation is largely defeated, many Americans remain upset with continued high prices for groceries, gas, rent and other necessities.

COVID cuts

This week’s cut is the first of its kind since the early days of COVID-19 when the Fed was forced to make an emergency rate reduction to keep credit flowing and limit economic damage.

The global pandemic had a ripple effect on the US economy—closing stores, disrupting supply chains and prompting businesses to lay off millions of employees.

The action was designed to promote the smooth functioning of markets and the flow of credit to households and businesses, with a view to improving economic activity and helping inflation return to the 2% objective.