US Federal Reserve drops rate cut bombshell

The US Federal Reserve has dropped a rate cut bombshell that is set to have huge ramifications on the looming presidential election.

The US Federal Reserve has cut its key lending rate by half a percentage-point in its first reduction since the onset of the Covid, sharply lowering borrowing costs shortly before November’s presidential election

The decision will affect the rates at which commercial banks lend to consumers and businesses, bringing down the cost of borrowing on everything from mortgages to credit cards.

The news will likely be well-received by Democratic candidate Kamala Harris, who has looked to highlight President Joe Biden’s economic record in her race against Donald Trump.

Policymakers voted 11-to-1 in favor of lowering the US central bank’s benchmark rate to between 4.75 percent and 5.00 percent, the Fed announced in a statement.

Stocks surged in reaction to the news as the central bank’s move confirms recent bets on Wall Street that the central bank would opt for a jumbo interest rate cut over a quarter-point cut.

But Fed Chair Jerome Powell said that economic observers should not assume that the half-point reductions “is the new pace” of further cuts.

“We’ve waited, and I think that that patience has really paid dividends in the form of our confidence that inflation is moving sustainably under 2%, so I think that is what enables us to take this strong move today,” Powell told reporters on Wednesday.

“I do not think that anyone should look at this and say, ‘Oh, this is the new pace’.”

With inflation barely above target levels, officials have been shifting their focus toward supporting a weakening job market and achieving a rare “soft landing,” whereby it curbs inflation without causing a sharp recession.

The US Federal Reserve has cut its key lending rate by half a percentage-point in its first reduction since the onset of the Covid. Picture: Stephanie Keith/Getty Images/AFP

Fed ‘gained greater confidence’

The Fed said its rate-setting 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.”

The bank has a dual mandate from Congress to act independently to tackle both inflation and employment.

Analysts were expecting the Fed to cut rates on Wednesday, as inflation eases toward the bank’s long-term target of two percent, and the labor market continues to cool in the surprisingly resilient post-Covid economy.

But they were highly uncertain about the size of the move, with some anticipating a small cut of a quarter of a percentage point, and others predicting the more significant half-point cut, which carries a greater risk of reigniting inflation.

In updated economic forecasts published alongside the Fed’s rate decision, policymakers’ median forecasts pointed to an unemployment rate of 4.4 percent, on average, in the fourth quarter of this year, up from 4.0 percent in the last update in June.

They also penciled in an annual headline inflation rate of 2.3 percent, slightly lower than in June.

The decision to cut more sharply to begin with caught some analysts by surprise. “In our base case the Fed cuts 25bp (basis points) but signals 100bp of cuts this year with the median 2024 ‘dot’”, economists at Citi wrote in an investor note published ahead of the rate decision.

But Fed Chair Jerome Powell said that economic observers should not assume that the half-point reductions “is the new pace” of further cuts. Picture: Mandel Ngan / AFP

Election stakes

The Fed’s mandate gives it the independence to set monetary policy solely on the basis of economic data.

But its decision will likely have political ramifications, given the importance of inflation and the cost of living to US consumers.

Americans have consistently said both are a top concern ahead of the election. Trump has repeatedly criticized Fed Chair Powell, who he first appointed to run the Fed, and has suggested that its decisions are political -- accusations the US central bank has strongly refuted.

- With AFP, The NY Post

Originally published as US Federal Reserve drops rate cut bombshell