The Federal Reserve cut interest rates Wednesday by half a percentage point, or 50 basis points, marking its first reduction since 2020 after a prolonged fight against inflation.
The decision, supported by 11 out of 12 Fed voters, brings the federal funds rate to a range from 4.75% to 5%.
In his speech announcing the rate cut, Federal Reserve Chair Jerome Powell expressed confidence in maintaining economic strength while also acknowledging that unemployment has risen to 4.2%.
The cut aims to benefit consumers and businesses, especially those with variable-rate debts.
“My initial reaction was surprise,” said Stephen Conroy, a University of San Diego professor of economics. “Powell has been so cautious, so deliberate, that I thought for sure they were going to recommend a 25 basis point (cut). I didn’t think it would go that far.”
That’s not to say he’s not pleased.
“I was delighted that they went with 50 basis points,” Conroy said. “I think it means they have enough data to allow them to do a 50-basis point cut and I’m really glad they did it.”
Rate cuts by the Fed should, over time, lead to lower borrowing costs for mortgages, auto loans and credit cards, boosting Americans’ finances and supporting more spending and growth.
Homeowners will be able to refinance mortgages at lower rates, saving on monthly payments, and even shift credit card debt to lower-cost personal loans or home equity lines. Businesses may also borrow and invest more.
Inflation has tumbled from a peak of 9.1% in mid-2022 to a three-year low of 2.5% in August, not far above the Fed’s 2% target. So the concern for policymakers has turned to unemployment, which has increased from 3.7% in January.
“They’re (Federal Reserve) changing the way they perceive the risks in the economy … the economy has changed,” Conroy said.
More cuts may be forthcoming. The Fed also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year – the first begins Nov. 6. And they envision four more rate cuts in 2025 and two in 2026.
The Fed’s move Wednesday reverses the inflation-fighting effort it engineered by raising its key rate 11 times in 2022 and 2023.
The Associated Press contributed to this report.
