The Federal Reserve, the American Central Bank, cut interest rates on Wednesday, (Sep.18) for the first time since early 2020, the clearest signal yet that the institution’s authorities believe they are winning their years-long battle against high inflation that has been troubling the United States for many months.
Fed officials cut rates by half a percentage point, an unusually large reduction. The decision lowers rates to about 4.9%.
The Fed’s action comes in response to months of declining inflation and aims to prevent the economy from slowing down so much that the labor market begins to crack. Officials are cautiously observing a recent uptick in the unemployment rate, and by starting with a large cut, the Fed is trying to avoid a further slowdown in employment.
“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 balanced,” Fed officials said in their statement.
The rate cut on Wednesday marks a preliminary victory. So far, Fed officials have managed to notably slow inflation without causing major economic problems. The unemployment rate has increased, but not painfully. Hiring continues, although it has slowed. Consumer spending remains strong. Overall growth is still robust. The resilience has led Fed officials to hope they can achieve a “soft landing,” something historically rare, in which they manage to put the economy on a healthy and sustainable path without causing a recession.
But the Fed’s task is not yet complete. Policymakers still need to decide how much and how quickly they will reduce interest rates in the coming months.
The forecast is that they may cut interest rates to 4.4% by the end of the year — well below the 5.1% they expected in June when they released their latest economic estimates. And by the end of 2025, they expect to reduce borrowing costs by another full percentage point, to 3.4%.
Source: The New York Times