US Fed reduces its benchmark interest rate for the first time in over four years

After more than four years of consistently increasing the interest rate benchmark, the US Federal Reserve has finally cut the benchmark by half a percentage point. The substantial cut deviates from the more common quarter-point adjustments, and it hits at the Fed’s growing concerns amid its commitment to combat inflation.

US Fed’s First Rate Cut In 4 Years

Discussing the decision, the Federal Open Market Committee (FOMC) said yesterday, September 18, that the Committee seeks to achieve maximum employment and inflation at the rate of 2% in the long run. The Committee added that it has greater confidence that inflation is moving sustainable toward the projected 2%.

This is why it judged that the risks to achieving the employment and inflation goals are in balance, for the most part.

With the first rate cut in four years, the federal funds rate went down to a range of 4.75% to 5%. In other words, the move marks the start of the first easing cycle since the start of the COVID-19 pandemic in early 2020.

The decision also came after two years of rather aggressive rate hikes, which were considered the best method to curb inflation. The inflation itself surged to 7% in 2022, but the Fed’s methods managed to bring it down to 2.5% as of July 2024. 

With these positive results, the Fed said that it is optimistic in regard to the inflation’s progress, expecting it to sink further to the targeted 2%.

While the Fed officials seem confident that the situation is moving in the right direction, they also acknowledged that the risks still remain. They pointed out the importance of maintaining the balance between the stability of prices and supporting a healthy labor market. The jobs have been slow-gaining, while the unemployment rate is once again growing.

A Fed Governor Opposed The Rate Decision For The First Time in 20 years

But, while many members of the Fed’s board agreed with the aggressive cut, some voices have opposed the decision. One example is a member of FOMC, Michelle Bowman, who voted against the decision, according to reports. 

Bowman argued that the quarter-point reduction should be smaller. More importantly, by arguing against the decision, Bowman also marked the first time that a Fed governor opposed a rate decision since 2005.

The Fed’s decision came after a long period of major economic shifts, which have seen inflation go up to a 40-year high due to various disruptions, many of which can be traced back to the pandemic. Various policy responses to the global situation in 2020 have caused considerable damage to the market, but at the time, the options were limited, and a quick solution was necessary.

Fortunately, the strict measures brought in response have caused inflation to show promising signs of moderation, and the Fed’s decision is expected t ripple through international markets, likely having a global impact.

Some have speculated that a larger cut could weaken the dollar, which could ensure benefits for other currencies. Some Asian markets, such as China and South Korea, have already reacted to the Fed changes, and their regional currencies have displayed significant movements.