On Sept 18, for the first time in four years and since the beginning of the COVID-19 pandemic, the Federal Reserve cut its benchmark interest rates by half a percentage point.
In its statement about the sizeable interest rate cut, the Federal Open Market Committee (FOMC) said, “In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent.”
The FOMC added, "In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.”
CNBC, which characterized the move as “an aggressive start to its first easing campaign in four years,” reported that aside from its emergency rate reductions during the pandemic, the last time the FOMC cut interest rates by half a point was back in the 2008 global financial crisis.
In its statement, the FOMC acknowledged that although recent indicators might point to the fact that economic activity has been expanding at a solid pace, “job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated.”
The FOMC also said that it is still trying to achieve a maximum employment and inflation rate of 2 percent over the longer run, adding that it has “gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
CNBC also reported that, in addition to this reduction, the FOMC shows through its “dot plot”—which is a chart that shows the federal funds rate projections for each Federal Reserve official—that there would be an equivalent to 50 more basis points of cuts by the end of 2024. According to CNBC, the “dot plot” also indicated that there would be another full percentage point in cuts by the end of 2025 and a half point in 2026. Altogether, the “dot plot” points to the benchmark rate lowering roughly 2 percentage points beyond the Sept. 19 move to cut rates.
The FOMC is actively monitoring economic data and will be adjusting its stance accordingly. In its statement, the FOMC said that “in assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.”
The FOMC also enumerated the factors on which it would base its future stance. “The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
The Wall Street Journal reported that Federal Reserve officials are currently attempting to balance a couple of risks. The first is that they wait to reduce rates, which increases joblessness and forces officials to scramble to make bigger rate cuts. The second is that the officials become too hasty about dialing back the rate increases.
It is a balancing act. the Journal further reported that on Sept. 18, Federal Reserve Chairman Jerome Powell tried to create a balance between expressing worries about the economy and being complacent about unemployment risks, quoting him as saying that there is the thought that “the time to support the labor market is when it’s strong” and not when layoffs start happening.