WASHINGTON (AP) ā The Federal Reserve on Wednesday cut its benchmark interest rate by an unusually large half-point, a dramatic shift after more than two years of that helped tame inflation but also made borrowing painfully expensive for American consumers.
The rate cut, the Fedās first in more than four years, reflects its new focus on bolstering the job market, which has shown clear signs of slowing. Coming just weeks before the presidential election, the Fedās move also has the potential to scramble the economic landscape just as Americans prepare to vote.
The central bankās action lowered its key rate to roughly 4.8%, down from a two-decade high of 5.3%, where it had stood for 14 months as it struggled to curb the worst inflation streak in four decades. Inflation has tumbled from a peak of 9.1% in mid-2022 to a three-year low of , not far above the Fedās 2% target.
The Fedās policymakers also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. And they envision four more rate cuts in 2025 and two in 2026.
In a statement and in a news conference with Chair Jerome Powell, the Fed came closer than it has before to declaring victory over inflation.
āWe know it is time to recalibrate our (interest rate) policy to something thatās more appropriate given the progress on inflation,ā Powell said. "Weāre not saying, āmission accomplishedā ... but I have to say, though, weāre encouraged by the progress that we have made.ā
āThe U.S. economy is in a good place," he added, "and our decision today is designed to keep it there.ā
Though the central bank now believes inflation is largely defeated, many Americans with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trumpās promise to slap tariffs on all imports would raise prices for consumers even further.
Rate cuts by the Fed should, over time, lead to lower borrowing costs , auto loans and credit cards, boosting Americansā finances and supporting more spending and growth. Homeowners will be able to refinance mortgages at lower rates, saving on monthly payments, and or home equity lines. Businesses may also borrow and invest more. Average mortgage rates have already dropped to an 18-month , according to Freddie Mac, spurring a jump in demand for refinancings.
āItās a step in the right direction,ā Laura Rosner-Warburton, senior economist of MacroPolicy Perspectives, said of Wednesday's Fed move.
The additional rate cuts it indicated it will make, she said, will āprevent risks from building and the unemployment rate from rising. They are trying to keep the economy in good shape.ā
In an updated set of projections, the policymakers collectively envision a faster drop in inflation than they did three months ago but also higher unemployment. They foresee their preferred inflation gauge falling to 2.3% by yearās end, from its current 2.5%, and to 2.1% by the end of 2025. And they now expect the unemployment rate to rise further this year, to 4.4%, from 4.2% now, and to remain there by the end of 2025. Thatās above their previous forecasts of 4% for the end of this year and 4.2% for 2025.
Powell was pressed at his news conference about whether the Fedās decision to cut its key rate by an unusually large half-point is an acknowledgement that it waited too long to begin reducing borrowing rates.
āWe donāt think weāre behind,ā he replied. āWe think this is timely. But I think you can take this as a sign of our commitment not to get behind. Weāre not seeing rising (unemployment) claims, not seeing rising layoffs, not hearing from companies that thatās something thatās going to happen.ā
He added: āThere is thinking that the time to support the labor market is when itās strong and not when you begin to see the layoffs. We donāt think we need to see further loosening in labor market conditions to get inflation down to 2%.ā
The Fedās next policy meeting is Nov. 6-7 ā immediately after the presidential election. By cutting rates this week, soon before the election, the Fed is risking attacks from Trump, who has argued that lowering rates now amounts to political interference. Yet Politico has reported that even some key Senate Republicans who were interviewed expressed support for a Fed rate cut this week.
Powell pushed back against any suggestion that the Fed shouldn't cut rates so close to an election.
āWeāre not serving any politician, any political figure, any cause, any issue,ā he said. "Itās just maximum employment and price stability on behalf of all Americans. And thatās how the other central banks are set up, too. Itās a good institutional arrangement, which has been good for the public, and I hope and strongly believe that it will continue.ā
Powellās characterization of the economy as fundamentally healthy, with inflation under control and employment stable but likely to benefit from rate cuts was an unspoken rebuttal to Trumpās warnings that an economic disaster is near.
The Fed's move Wednesday reverses the inflation-fighting effort it engineered by raising its key rate 11 times in 2022 and 2023. Wage growth has since slowed, removing a potential source of inflationary pressure. And oil and gas prices are falling, a sign that inflation should continue to cool in the months ahead. Consumers are also against high prices, as Target and McDonaldās to dangle deals and discounts.
The Fedās decision drew the first dissent from a member of its governing board since 2005. Michelle Bowman, a board member who has expressed concern in the past that inflation had not been fully defeated, said she would have preferred a quarter-point rate cut.
But the Fed's policymakers as a whole appear to recognize that after years of strong job growth, employers have slowed hiring, and the unemployment rate nearly a full percentage point from its half-century low in April 2023 to a still-low 4.2%. Once unemployment rises that much, it tends to keep climbing.
At the same time, the officials and many economists have noted that the rise in unemployment this time largely reflects an influx of people seeking jobs ā notably new immigrants and recent college graduates ā rather than layoffs.
The Fedās attention now is āpreserving the health of the labor market and preventing unnecessary damage to the economy from a pretty restrictive (interest rate) stance,ā said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
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AP Writers Alex Veiga in Los Angeles, Paul Wiseman and Josh Boak in Washington and Stan Choe in New York contributed to this report.
Christopher Rugaber, The Associated Press
