U.S Fed reduces interest rates by 50 basis points

The Federal Reserve dropped benchmark interest rates by half a percentage point on Wednesday In an attempt to stave off a slowdown in the labor market, marking its first rate reduction since the early stages of the Covid epidemic.

The Federal Open Market Committee of the central bank decided to drop its benchmark overnight borrowing rate by 50 basis points, or half a percentage point, in response to improving inflation and job market conditions. This move confirmed market expectations, which had lately changed from expecting a fall of half that magnitude.

The previous time the FOMC reduced by half a point was in 2008, during the global financial crisis, except for the emergency rate reduction during COVID-19.
The ruling means the federal funds rate will now be between 4.75% and 5%. Although the rate determines banks’ short-term borrowing costs, it also affects several consumer goods, including credit cards, mortgages, and vehicle loans.

Along with this decrease, the committee showed on its “dot plot” that by year’s end, there would be an additional 50 basis points drop, or about market price. According to the expectations matrix of individual officials, there will be an extra full percentage point of reduction by the end of 2025, followed by a half-point in 2026.

The dot plot indicates that the benchmark rate will decline by roughly 2 percentage points after Wednesday’s change.

The committee concluded that “job gains have slowed and the unemployment rate has moved up but remains low” after evaluating the status of the economy. FOMC members reduced the prediction for inflation to 2.3% from 2.6% before and increased their predicted unemployment rate for this year to 4.4% from the 4% projection in the previous update in June.  The committee lowered its core inflation forecast from June to 2.6%, a decrease of 0.2 percentage points.