The U.S. Federal Reserve has cut its benchmark interest rate by half a percentage point, marking the central bank’s first reduction in over four years.
The decision, announced on Wednesday after the Federal Open Market Committee’s two-day meeting, lowers the federal funds rate to a new range of 4.75% to 5%.
This move has sent a wave of optimism through financial markets, with the Dow Jones Industrial Average jumping 300 points shortly after the announcement.
The rate cut, which affects everything from credit cards to mortgages, comes as the Fed continues its efforts to balance economic growth with inflation control.
The cut represents the first time the Fed has lowered rates since March 2020, when the economy was struggling under the initial impact of the COVID-19 pandemic.
Federal Reserve Chair Jerome Powell explained that strong economic indicators, such as solid job market data and progress in reducing inflation, gave the central bank the confidence to make the cut.
“We have been patient, and inflation has come down. I think we are in a very good position,” Powell said during a press conference.
While unemployment has ticked up slightly, it remains at historically low levels, and the Fed believes the economy is in a good position to sustain growth with this rate cut.
Stocks rallied in response to the Fed’s decision, with major indices gaining nearly 0.9% by the end of the day. Treasury yields slipped, and the U.S. dollar index fell by almost 0.5%.
The move is expected to ease borrowing costs for consumers and businesses alike, affecting loans, credit cards, and mortgage rates.
“The committee has gained greater confidence that inflation is moving sustainably toward 2%,” the Fed said in its post-meeting statement.
According to Powell, the half-point cut does not necessarily set the pace for future reductions. “We can go quicker or slower or pause on rate cuts if it is appropriate,” Powell added.
Despite the positive market reaction, not all experts are on board with the aggressive nature of the rate cut.
Critics, including Nancy Tengler, CEO at Laffer Tengler Investments, argue that the Fed may be acting too quickly. “My criticism of the Fed has been a myopic focus on backward-looking data,” Tengler said, calling Powell’s approach a premature move.
The timing of the rate cut, which comes just ahead of the November presidential election, has drawn political scrutiny.
Former President Donald Trump, a vocal critic of the Federal Reserve, argued that the move was ill-timed, stating earlier this year that “the Fed knows they shouldn’t be lowering rates this close to an election.”
However, Powell dismissed concerns over the political implications, stating that the Fed’s focus remains on stabilizing the economy.
President Joe Biden, meanwhile, celebrated the news, tweeting: “We just reached an important moment: inflation and interest rates are falling while the economy remains strong.”
Looking ahead, economists expect another rate cut by the end of the year, potentially lowering the federal funds rate further to a projected 4.4%.
The next Fed meeting is scheduled for November 6-7, where further adjustments to the policy may be discussed.