Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of this year

The United States Federal Reserve has cut interest rates by half of a percentage point, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs that follows growing unease about the health of the job market.

“The committee 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,” policymakers on the US central bank’s rate-setting committee said in their latest statement on Wednesday, which drew a dissent from Governor Michelle Bowman, who favoured a quarter-percentage-point cut.

Policymakers see the Fed’s benchmark rate falling by another half of a percentage point by the end of this year, another full percentage point in 2025 and a final half of a percentage point in 2026 to end in a range of 2.75 percent to 3 percent.

The endpoint reflects a slight upgrade, from 2.8 percent to 2.9 percent, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.

Even though inflation “remains somewhat elevated”, the Fed statement said policymakers chose to cut the overnight rate to the 4.75 percent to 5 percent range “in light of the progress on inflation and the balance of risks”.

The Fed “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,” with attention to “both sides of its dual mandate” for stable prices and maximum employment.

“The Fed cut of 50bps [basis points] shows they are serious about easing and trying to catch up,” Rachel Ziemba, economist and adjunct fellow at the Center for a New American Security, told Al Jazeera. “It’s a bit more than the consensus expected, … but I don’t think it’s a sign they expect a recession but is a sign that the recent softening labour market and easing inflation has given them space.”

Fed’s strategy

Fed Chairman Jerome Powell will hold a news conference at 2:30pm (18:30 GMT) to discuss the policy decision and the economic outlook. The Fed’s policy meeting this week was its last before voters go to the polls in what is expected to be a close US presidential election on November 5.

The size of the initial cut will likely raise questions about the Fed’s strategy and whether policymakers were merely trying to account for the fast decline in inflation since last year or address concerns among some officials that the US job market may be weakening faster than desired or needed to ensure inflation fully returns to the Fed’s 2 percent target.

It is currently about half a percentage point above that, and the new economic projections now show the annual rate of increase in the personal consumption expenditures price index falling to 2.3 percent by the end of this year and to 2.1 percent by the end of 2025.The unemployment rate is seen ending this year at 4.4 percent, higher than the current 4.2 percent, and remaining there through 2025. Economic growth is projected at 2.1 percent through 2024 and 2 percent next year, the same as in the last round of projections issued in June.

The Fed had held its policy rate in the 5.25 percent to 5.5 percent range since July of 2023 as inflation fell from a 40-year high to a level that is now approaching the central bank’s target.