Federal Reserve Cuts Key Interest Rate by Half a Percentage Point to Cushion Economy
The Federal Reserve made a bold move on Wednesday by lowering its key interest rate by half a percentage point in an effort to bolster the economy against a further slowdown. Fed Chair Jay Powell emphasized that the labor market and the economy are still in good shape, but the rate cut was necessary to maintain stability.
The decision has already sparked political commentary, with GOP vice presidential nominee J.D. Vance blaming Vice President Kamala Harris for policies that led to higher rates in the first place. However, mainstream economists point to other factors such as a lack of new home construction and rising costs as the main drivers of housing affordability issues.
In response to the rate cut, Harris welcomed the news but reiterated her focus on lowering prices for everyday needs like healthcare and housing. Former president Donald Trump, on the other hand, has expressed a desire for presidents to have a say in interest rate decisions, a notion that Powell rejected.
The federal funds rate will now stand at around 4.8%, the lowest level since March 2023, with further cuts expected at the Fed’s remaining meetings this year. Markets reacted positively to the news, with both the Dow Jones Industrial Average and the S&P 500 hitting all-time highs.
Analysts were surprised by the size of the rate cut, with some calling it a historic move. Seema Shah, chief global strategist at Principal Asset Management, praised the Fed’s decision and expressed confidence in the economy’s future. Brian Coulton, Fitch Rating’s chief economist, noted the Fed’s focus on maximum employment and improved confidence in inflation progress.
Despite mixed economic signals, including a slight increase in the unemployment rate and sluggish hiring in certain sectors, the Fed remains committed to using the federal funds rate to regulate inflation and unemployment. The rate hike in response to the Covid-19 pandemic has now been reversed in an effort to stimulate demand and encourage hiring.
