The US Federal Reserve announced its sixth policy decision for 2024 on Wednesday, September 18, after a two-day Federal Open Market Committee (FOMC) meeting. For the first time in four years, US Fed chair Jerome Powell-led rate-setting panel slashed its benchmark interest rate by (50 bps) half a percentage point to 4.75 per cent—5 per cent.
The US central bank maintained the key borrowing rate elevated at the 23-year high for 14 consecutive months since July 2023 to combat the worst inflation outbreak in almost 40 years. In its policy statement, the Fed policymakers said FOMC gained greater confidence that inflation is moving sustainably toward the two per cent target level. It added that “risks to achieving its employment and inflation goals are roughly balanced.”
Follow US Fed Meet Live Updates: Powell-led FOMC delivers 50 bps rate cut for first time in 4 years, eyes 2 more in 2024
"It is time to recalibrate our policy to something more appropriate, given the progress on inflation and employment moving to a more sustainable level," Fed Chair Jerome Powell told reporters in a post-policy press conference after unveiling the rate cut verdict. "This is the beginning of that process," he added.
The FOMC voted 11 to 1 to lower the federal funds rate to a range of 4.75 per cent to 5 per cent after holding it for over a year at its highest level in two decades. It was the US Fed’s first rate cut since 2020.
US Fed Governor and board member Michelle Bowman voted against the decision in favour of a smaller, quarter-point cut, the first such dissent since June 2022 and the first time a Fed governor has dissented since September 2005.
The Fed kicked off an aggressive monetary policy tightening cycle by raising the policy rate by 5.25 percentage points since March 2022—in one of the swiftest Fed reactions to rising price pressures that eventually hit a four-decade high peak.
The Fed’s rate hikes have helped lower annual inflation from 9.1 per cent in June 2022 to 2.5 per cent. However, high rates have made borrowing costlier for businesses and households. According to economists, policymakers must keep rates high enough to defeat rising inflation without derailing the economy.
The longer the Fed keeps borrowing costs high, the more it risks weakening the economy too much and causing a recession. Yet, if it cuts rates too soon, it risks reigniting inflation, which is still volatile due to geopolitical conflicts and an uncertain economic outlook.
In addition to approving the half-percentage-point cut on Wednesday, US Fed policymakers projected the benchmark interest rate would fall by another half of a percentage point by the end of this year - in their final two meetings this year, due in November and December.
US Fed foresees a full percentage point next year and half of a percentage point in 2026, which means they envision four more rate cuts in 2025 and two in 2026. However, they cautioned that the outlook that far into the future is necessarily uncertain.
Powell cautioned against assuming the half-point move sets a pace that policymakers would continue. “I do not think that anyone should look at this and say, "Oh, this is the new pace,” he said. Until recently, officials focused on combating inflation. Fed said in its statement that it is “strongly committed to supporting maximum employment” and bringing inflation back to its goal.
In their statement, policymakers said they would consider “additional adjustments” to rates based on “incoming data, the evolving outlook and the balance of risks.” They also noted that inflation “remains somewhat elevated” and job gains have slowed.
The current policy decision begins a new chapter for the US Fed, which started lifting borrowing costs in early 2022 to curb a pandemic-driven price surge. US inflation, driven by supply-chain disruptions and a wave of demand from locked-down consumers, ultimately climbed to its highest level since 1981.
The central bank raised rates 11 times, bringing its benchmark to a two-decade high in July 2023. Since then, inflation has cooled considerably and — at 2.5 per cent — is nearing the Fed’s two per cent target. While the labour market has weakened, there is no clear indication the US economy is in recession or on the cusp of falling into one.
In updated forecasts published alongside the US Fed's rate decision, policymakers' median projections pointed to an unemployment rate of 4.4 per cent in the fourth quarter of this year, up from 4 per cent in the last update in June.
That would represent a small deterioration from the current 4.2 per cent. The unemployment rate is projected to be at 4.4 per cent through 2025. Powell said last month that further cooling in the labour market would be “unwelcome.”
The median forecast for inflation at the end of 2024 declined to 2.3 per cent, slightly lower than in June. Based on the Fed's preferred measure, inflation is currently about half a percentage point above the 2 per cent level.
The new projections show the annual rate of increase in the personal consumption expenditures (PCE) index falling to 2.3 per cent by the end of this year and to 2.1 per cent by the end of 2025.
Policymakers still don’t see inflation returning to their 2 per cent target until 2026. Economic growth is projected to be 2.1 per cent through 2024 and 2 per cent next year, the same as in the last round of projections issued in June.
In its policy statement, the US Fed said, ‘’The Committee will continue reducing its holdings of Treasury securities, agency debt and agency mortgage‑backed securities.'' The Fed had announced it would scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing $25 billion in Treasury bonds to run off each month compared to the current $60 billion.
Powell said on Wednesday that strong liquidity in the financial system will allow the central bank to proceed with shrinking its balance sheet even as it has begun cutting rates. "Reserves are still abundant and are expected to remain so for some time," Powell told reporters at the post-policy press conference.
The Fed will allow excess liquidity to continue draining from the financial system. Powell clarified that he believes the Fed can reduce the balance sheet—known as quantitative tightening—and simultaneously lower rates. “We’re not thinking about stopping runoff because of this,” he said. “We know that these two things can happen side by side, in the sense they’re both a form of normalization.”
Mortgage-backed securities will continue to run off by up to $35 billion monthly. The central bank has been winding down its holdings since June 2022 — a process known as quantitative tightening. Fed policymakers gradually increased the combined amount of Treasury and mortgage bonds, allowing them to run off without reinvesting to $95 billion monthly.
Major stock indexes closed with modest losses, and the US dollar gained ground in choppy trading on Wednesday after the US Federal Reserve opted for a supersized cut in its first move to borrowing costs in over four years.
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The Dow Jones Industrial Average closed down 0.25 per cent, at 41,503.10, and the Nasdaq Composite shed 0.31 per cent, to end at 17,573.30. The benchmark S&P 500 rose as much as one per cent after the verdict before retreating to close down 0.29 per cent at 5,618.26.
MSCI's index of world stocks rose to a record high during the session before dropping. It was last quoted down 0.29 per cent at 826.29. The US dollar index, which measures the greenback against a basket of currencies, including the yen and the euro, weakened after the verdict, before rising 0.07 per cent to 100.98.
