Federal Reserve Approves 0.50% Cut to Interest Rate

The Federal Open Market Committee (FOMC) has reduced the federal funds rate target range, approving a 0.50% cut to interest rates based on inflation progress and risk balance. Furthermore, the Federal Reserve reiterated their committed to supporting their dual mandate and will assess incoming data, outlook, and risk balance before making further adjustments.

Federal Reserve Chair, Jerome Powell, stated the US economy is in good shape, with a solid growth rate and decreasing inflation. Furthermore, Powell aimed to maintain this status through a policy move, stating the labor market is also strong and the government is committed to maintaining this situation.

Economic activity has been expanding steadily, however, job gains are slowing and the unemployment rate rising despite remaining relatively low. Inflation has made steady progress towards the 2 percent objective, but remains elevated. Due to the economic outlook remaining uncertain, the Federal Reserve believes it is appropriate to proceed forward with a cut to interest rates.

The monetary policy to approve a cut to interest rates was supported by a majority of members, including Jerome H. Powell, John C. Williams, Thomas I. Barkin, Michael S. Barr, Raphael W. Bostic, Lisa D. Cook, Mary C. Daly, Beth M. Hammack, Philip N. Jefferson, Adriana D. Kugler, and Christopher J. Waller.

However, Michelle W. Bowman voted against, preferring to lower the federal funds rate target range by a quarter percentage point (0.25%) instead of the 0.50%.

Federal Reserve’s Projections

Powell discussed the Federal Reserve’s projections for the US economy, which predict a peak unemployment rate of 4.4% at the end of 2024, compared to the current rate of 4.2%. Furthermore, the Federal Reserve expects inflation to fall to 2.3% by the end of 2024, with the goal of eventually reaching 2%. The Fed funds interest rate has now fallen from 5.5% to 5.0%, with plans to further cut down to 4.5% by the end of 2024. Additionally, the Fed expects continued interest rate cuts in 2025, with an expected reduction to 3.5% by the end of 2025 and further reductions in 2026 to 3.0%. Powell repeatedly emphasized these are just the beginning of the ongoing cut to interest rates.

Governor Michelle Bowman Dissents

Governor Bowman disagreed with the Federal Open Market Committee’s decision to lower the target range for the federal funds rate by a 0.50%, instead preferring to lower by 0.25%. Governor Bowman claimed the federal funds rate level should be adjusted to reflect the progress made in lowering inflation and cooling the labor market since mid-2023, suggesting a smaller initial step towards a more neutral policy stance.

The U.S. economy is robust, with growth in activity and a near-full employment labor market. Although hiring has slowed, layoffs remain low. Normalization in labor market conditions is necessary to reduce wage growth to 2% inflation. Labor market data is uncertain due to measurement challenges and immigration effects. However, solid growth in spending data, particularly consumer spending, indicates a healthy labor market.

Inflation remains above the 2% goal due to a 2.5 percent rise in core personal consumption expenditures prices from 12 months earlier. This has a significant impact on lower and moderate income households. To achieve a stable economy, it is crucial to return to low and stable inflation at the 2% goal. Although progress has been made in lowering inflation, there is a risk the Committee’s policy action could be seen as a premature declaration of victory on price stability. A measured pace towards a more neutral policy stance would ensure further progress in bringing inflation down to the 2% target and avoid unnecessary demand-stoking.

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