The Federal Reserve cut rates by half a point and signaled an era of easing

The Federal Reserve cut its benchmark interest rate by half a percentage point on Wednesday and signaled further cuts, launching its first easing cycle since the pandemic began.

The U.S. central bank's first cut in more than four years kept the federal funds rate between 4.75 percent and 5 percent. Michelle Bowman, a member of the Federal Open Market Committee, voted in favor of a quarter-point cut – the first Fed governor to dissent from a rate decision since 2005.

The bumper half-point cut suggests the U.S. central bank is looking to pre-empt any weakness in the U.S. economy and labor market after holding them at their highest levels since 2001 for more than a year.

The last time the Fed cut rates by more than a quarter point was when Covid-19 tore through the global economy in 2020.

“The U.S. economy is in a good place, and our decision today is designed to keep it there,” Fed Chair Jay Powell said at a news conference on Wednesday. “This recalibration of our policy stance will help maintain the strength of the economy and labor market and enable further progress on inflation as we begin the process of moving toward a more neutral stance.”

Powell said rates were not on a “preset” path, noting that the Fed could “dial back policy restraint more slowly” if inflation proves sticky. Likewise, the central bank was “ready to react” if the labor market unexpectedly weakened, he added.

“We don't think we're lagging behind [in cutting rates]”Powell said. “But you can take it as a sign of our commitment not to back down.”

In a statement on Wednesday, the FOMC said it had gained “greater confidence” about inflation, although it remained “somewhat elevated.”

U.S. stocks rose immediately after the announcement and topped out shortly after Powell began his press conference. The S&P 500, which was flat earlier in the day, jumped as much as 1.1 percent, briefly surpassing its intraday record but closing slightly lower on the day.

The Treasury yield curve has sharpened with the spread between 10-year and two-year bonds, an indicator of future growth expectations, reaching levels last seen in June 2022.

The yield on the policy-sensitive two-year note slipped 0.06 percentage points to 3.59 percent after the Fed's announcement but later rebounded to 3.63 percent. Bond yields move inversely to prices.

Asian markets fell on Thursday morning. Mainland China's CSI 300 stock index rose 0.8 percent, Hong Kong's Hang Seng rose 1.8 percent and Japan's Topix rose 2.4 percent.

The yen weakened to ¥143.2 against the dollar after earlier strengthening over ¥140 earlier in the week, as traders expected the Bank of Japan not to raise rates at a policy meeting ending Friday.

In the latest “dot plot” of officials' forecasts, the most expected policy rate will fall from 4.25 percent to 4.5 percent by the end of 2024, suggesting another big half-point cut at either of the two remaining meetings this year. A decrease of two quarter-points. Overall, that's a significantly larger drop than the quarter-point cut projected by most officials in June, when the dot plot was last updated.

Of the 19 officials who penciled in estimates, they thought the Fed should hold off after Wednesday's reduction, while seven others forecast just one more quarter-point cut this year.

Policymakers also expected the funds rate to fall another percentage point in 2025, ending the year between 3.25 percent and 3.5 percent. By the end of 2026, it was projected to drop below 3 percent.

Some analysts said the Fed's decision pointed to underlying concerns about the economy.

“It's a very muddy picture out there,” said Jack Manley, global market strategist at JPMorgan Asset Management. “The macro data is not nearly as clear as we'd like. The Fed is looking at the economy and saying: 'We're making more progress on inflation than we thought, but we think the labor market is starting to slip and it could get worse.' This is not a good sign for me.”

Wednesday's decision is a milestone for the central bank after more than two years of battling inflation — and a significant moment in this year's presidential election.

Lower borrowing costs would be a boon for Democratic candidate Kamala Harris, whose campaign has been weighed down by voter dissatisfaction with the high cost of living despite a booming US economy.

President Joe Biden welcomed the Fed's move, saying in a post on X: “We've just reached a critical moment: inflation and interest rates are falling while the economy remains strong. Critics said it couldn't happen — but our policies have cut costs and created jobs.”

The cut comes as Fed officials become more confident that inflation is under control and focus their attention on the health of the labor market.

After peaking at around 7 percent in 2022, the personal consumption price index was just 2.5 percent in July, close to the Fed's 2 percent target.

But job growth has cooled in recent months and other measures of demand, such as vacancies, have also slowed, even as the number of Americans filing for unemployment benefits remains historically low.

The Fed has made clear it does not want to see the labor market weaken further amid concerns it has waited too long to loosen its grip on the economy by lowering borrowing costs.

In estimates released Wednesday, most officials predicted the unemployment rate would peak at 4.4 percent over the next two years, up from its current level of 4.2 percent and higher than a June estimate, where economic growth would stabilize at 2 percent. The next few years.

Officials forecast a more benign inflation scenario, with PCE returning to target in 2026. The median estimate for “core” inflation, which excludes volatile food and energy prices, was revised down to 2.6 percent for this year, before declining to 2.2 percent and 2 percent in the next two years.