The United States has begun closing a long era of fighting inflation with high interest rates. On Wednesday, the Federal Reserve announced a 0.50 percentage point cut in the federal funds rate. The move had been broadly anticipated, but before the announcement there was speculation whether the cut would be a quarter-point or half-point. With the decision confirmed, the target range sits at 4.75% to 5%, and forecasts point to an additional half-point of cuts before year end, signaling a new phase for U.S. monetary policy.
The decision was not unanimous, with one governor dissenting who favored a softer cut. This marked the first dissent by a Fed governor since 2005. Yet the more aggressive stance prevailed, and the central bank signaled renewed confidence, even as the accompanying statement acknowledged ongoing uncertainty about the economy’s path.
“We are not on a fixed path”, Powell said at his press conference, outlining the projections for future reductions—half a percentage point this year, with meetings in November and December, and a policy rate of about 3.4% by the end of 2025.
“The projections are not a plan”, he added. “Nothing suggests we are in a hurry. We will meet data, outlook, and balance of risks, and we will move quickly, slowly, or pause as appropriate.”
A Turning Point in U.S. Policy
In response to the crisis unleashed by the Covid-19 pandemic, the Federal Reserve began raising rates at an unprecedented pace, lifting them by 5.25 percentage points from March 2022 through July 2023 to reach their highest levels in two decades. Those higher rates remained in place for more than a year as policymakers sought to cool the economy and rein in inflation.
The Fed, guided by Powell, managed to bring inflation down to roughly 2.5% by August, well below the 9.1% peak seen in mid-2022. At the same time, the labor market cooled, with unemployment reported around 4.2%. With its dual mandate, the Fed signaled that protecting the job market would receive heightened attention alongside price stability.
Powell has stressed that the labor market is not weak, merely softer than it was before the pandemic, and remains solid by many measures. “Our aim with policy moves is to keep it that way”, he said.
Arguments
Few times in recent memory has there been so much uncertainty around a Fed decision, even though the course to a rate cut was widely anticipated. The debate centered on how large the cut should be. Several Fed officials had flagged July for easing, and Powell hinted at Jackson Hole that “the time to adjust policy has arrived”, but the exact size of the move was contested by analysts.
A 0.25 percentage point cut would have the advantage of preventing an overly brisk pace of growth that could rekindle inflation. A 0.50 percentage point cut would be read as a clear commitment to protecting the labor market. In the end, the more sizable adjustment prevailed.
The Fed also released its quarterly economic projections, offering a roadmap for the coming months. The projections imply another 0.50 percentage point cut by year-end, and a forecast for unemployment to end 2025 around 4.4%, versus the current reading near 4.2%.
Elections
The rate cut has resonated in political circles. Vice President Kamala Harris, the Democratic nominee, has highlighted inflation and price pressures that weigh on voters, while opponents such as Donald Trump frame the economy as underperforming. There is a palpable disconnect between how Americans feel about the economy and what the data show.
Still, it seems unlikely that this single move will instantly alter voter sentiment or mute political attacks. In fact, even before the announcement, Trump criticized the cut as a political maneuver and argued at a campaign stop in Michigan that the economy was not performing well.