Fed Cuts Rates by Half Point In Decisive Bid to Defend Economy
They also noted that inflation “remains somewhat elevated” and job gains have slowed.
Officials updated quarterly economic forecasts, raising their median projection for unemployment at the end of 2024 to 4.4% from 4% forecast in June. That would represent a small deterioration from the current level of 4.2%. Powell said last month that further cooling in the labor market would be “unwelcome.”
The median forecast for inflation at the end of 2024 declined to 2.3%, while the median projection for economic growth ticked down to 2%. Policymakers still don’t see inflation returning to their 2% target until 2026.
Officials again raised their projection for the long-run federal funds rate to 2.9% from 2.8%. Wednesday’s decision begins a new chapter for the Fed, which started lifting borrowing costs in early 2022 to curb a pandemic-driven surge in prices. Inflation, fanned by supply-chain disruptions and a wave of demand from locked-down consumers, ultimately climbed to its highest level since 1981.
The central bank raised rates 11 times, bringing its benchmark to a two-decade high in July 2023.
Since then, inflation has cooled considerably and — at 2.5% — is nearing the Fed’s 2% target. And while the labor market has weakened, there’s no clear indication the US economy is in recession or on the cusp of falling into one. Layoffs remain low, consumers are still spending and economic growth is strong.
Still, there are growing signs of strain. Excess savings that helped support Americans in recent years have run dry, and delinquency rates are rising. An increase in job losses could trigger a pullback in spending and slow the economy.
The muddied economic picture has increased uncertainty and spurred divisions among Fed officials over the best path forward for policy. Some are anxious to curb labor-market weakness before it spirals into more pain. Others worry that cutting rates too quickly may reignite demand and keep inflation elevated.
Fed Chairman Jerome Powell. Credit: Bloomberg
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