The US Federal Reserve voted to cut interest rates by 50 basis points as rate-setters opted for a larger rate cut to support the weakening labour market.
The eagerly anticipated decision means the federal funds rate fell to a range of 4.5-5.0 per cent, the first time rates have been reduced since 2020.
“The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate,” the Fed said in a statement.
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US inflation falls to lowest level since February 2021 as Fed prepares to cut interest rates
The larger than usual cut suggests the Fed is worried about the potential impact on the economy of high interest rates, and the central bank said it was “strongly committed” to maintaining full employment.
Irene Tunkel, BCA Research’s chief US equities strategist said the size of the rate cut “flags the Fed’s unease with the deteriorating employment picture,”
Today’s rate decision was the most uncertain in years, with investors torn in the run-up to the decision about whether the Fed would cut rates by 25 or 50 basis points.
As little as a week ago, a 25 basis point cut looked nailed on, but markets steadily ramped up bets on a jumbo cut in the run-up to the decision even though there were few new data points.
Speculation about a larger rate cut picked up steam in early August, when a jobs report showed a rapid increase in unemployment alongside a sharper than expected slowdown in jobs growth.
This sparked fears that the world’s largest economy, having been so resilient for so long, was on the cusp of a downturn.
The most recent jobs figures, out earlier this month, calmed nerves slightly, but did not entirely dispel fears that the economy might fall into a recession.
In the end policymakers opted for a more aggressive move, with rate-setters pencilling in a further 50 basis points of easing in the remainder of the year.
The Fed’s statement drew attention to the health of the labour market, noting that “job gains have slowed, and the unemployment rate has moved up but remains low”.
Officials at the central bank forecast that the unemployment rate would climb to 4.4 per cent by the end of the year, up from 4.2 per cent at the moment.
Despite fears over the labour market, the Fed’s ‘dot-plot’ graphs suggest a soft landing is likely, with growth projected at around two per cent while inflation hovers around the target for the next couple of years.
Inflation fell to 2.5 per cent in August, its lowest level since February 2021. Fed officials drew attention to the “further progress” on inflation, although they cautioned that price pressures remain “somewhat elevated”.
Richard Flax, chief investment officer at Moneyfarm, said the size of the cut reflects the Fed’s belief “inflation is now within manageable levels”.
The Fed’s decision comes just a day before the Bank of England announces its own latest decision on interest rates. The MPC is widely expected to leave rates on hold, although the odds of a cut have edged higher over the past few days.