(Bloomberg) — The Federal Reserve cut its key interest rate by half a percentage point on Wednesday, in an aggressive start to a policy shift aimed at strengthening the U.S. labor market.
Projections released after their two-day meeting showed a narrow majority, 10 of 19 officials, favored cutting rates by at least an additional half point over their remaining two meetings in 2024.
The Federal Open Market Committee voted 11 to 1 to cut the federal funds rate to a range of 4.75% to 5% after holding it for more than a year at the highest level in two decades.
“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving steadily up to 2%,” it said. in a press conference Fed chairman Jerome Powell. after the announcement.
Powell cautioned against assuming the half-point move set a pace that policymakers would continue.
The Fed's statement indicated that policymakers view risks to employment and inflation as “roughly balanced.” The committee is “strongly committed to supporting maximum employment” in addition to returning inflation to its target, officials said.
The S&P 500 index rose while Treasury yields and the Bloomberg dollar index fell.
Policymakers penciled in an additional percentage point of cuts in 2025, according to their median forecast.
Governor Michelle Bowman dissented in favor of a smaller quarter-point cut, the first dissent by a governor since 2005 and the first dissent by any FOMC member since 2022.
KPMG chief economist Diane Swonk said Powell's willingness to cut aggressively despite a governor's disapproval was a sign of “how much he wanted this half-percent rate cut.”
In their statement, policymakers said they would consider “additional adjustments” to tariffs 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.
Officials updated their quarterly economic forecasts, raising their median projection for unemployment at the end of 2024 to 4.4% from the 4% forecast in June. This would represent a slight deterioration from the current level of 4.2%. Powell said last month that further cooling in the labor market would be “unwelcome.”
The average forecast for inflation at the end of 2024 fell to 2.3%, while the average projection for economic growth dropped to 2%. Policymakers still do not see inflation returning to their 2% target by 2026.
Officials again raised their forecast for the long-term federal funds rate to 2.9% from 2.8%.
Wednesday's decision begins a new chapter for the Fed, which began lifting borrowing costs as early as 2022 to curb a pandemic-induced surge in prices. Inflation, fueled by supply chain disruptions and a wave of demand from shuttered consumers, eventually climbed to its highest level since 1981.
The central bank raised interest rates 11 times, taking its benchmark to a two-decade high in July 2023.
Since then, inflation has fallen sharply and – at 2.5% – is approaching the Fed's 2% target. And while the job market has weakened, there is no clear indication that the US economy is in a recession or on the verge of one. Layoffs remain low, consumers continue to spend and economic growth is strong.
However, there are growing signs of strain. Excess savings that helped support Americans in recent years have dried up and delinquency rates are rising. An increase in job losses could cause a pullback in spending and slow the economy.
The murky economic picture has heightened uncertainty and fueled divisions among Fed officials over the best path forward for policy. Some are concerned to curb labor market weakness before it turns into more pain. The others worry about cutting rates too quickly can reignite demand and keep inflation rising.