The Fed hints at a major rate cut as it gains ‘greater confidence’ about inflation

WASHINGTON – The U.S. central bank on Wednesday began a series of expected interest rate cuts with a more than normal percentage cut that Federal Reserve Chairman Jerome Powell said was intended to show policymakers’ commitment to keeping the unemployment rate low. now inflation has come down.

“We’ve made a good solid start and I’m very pleased that we did,” Powell said at a press conference after the Fed, noting its growing confidence that the world’s battle with high inflation is over, cut its policy rate by 50 basis points. in the 4.75%-5.00% range. “The logic of this from an economic and risk management perspective was clear.”

It is clear that Powell, who has been fighting for policy consensus since becoming the head of the Fed in 2018, saw the first opposition of the Fed governor since 2005 when Michelle Bowman voted against the decision in favor of the minimum rate of a quarter-point. cut – evidence that some analysts have cited as his motivation to start the Fed’s tapering cycle in a compelling way.

Powell called the move “a readjustment” to account for the sharp drop in inflation from last year; he noted that the economy remains strong but the central bank wants to stay ahead and avoid any volatility in the job market; analysts saw it as a nod to what was his main aim to avoid trading unnecessarily high unemployment in order to meet the bank’s 2% inflation target.

“A soft landing is within reach, which could underline his legacy as Fed Chair,” said Diane Swonk, chief economist at KPMG.

In addition to approving a half-percentage point cut on Wednesday, Fed policymakers estimated interest rates would drop another half-percentage point by the end of this year, a full percentage point next year, and half a percentage point. by 2026, although they cautioned that the future outlook is uncertain.

The move marks an important pivot in US monetary policy and a recognition of the Fed’s growing comfort as inflation moves closer to its target. Right now it’s about half a percentage point above it.

Despite coming only seven weeks before the US presidential election, the Fed’s policy decision elicited a muted reaction, at least, from the presidential candidates.

Vice President Kamala Harris, the Democratic front-runner, called the figure “welcome news” for Americans.

“I know that the prices are still very high for many middle class and working families,” he said in a statement.

Republican nominee Donald Trump, who first nominated Powell as president to lead the Fed, said the size of the cuts suggested the economy could be in trouble.

“To cut it that much, we think they’re not just playing politics, the economy could be very bad,” Trump told reporters.

Powell, however, said the economy remains strong, with many job market indicators such as jobless claims and the current unemployment rate of 4.2% not at worrying levels.

But he nodded to the same issues economists and analysts have raised about inflation: That it takes time for changes in monetary policy to have an impact and that, amid unusual information from companies and reduced hiring rates, officials felt they had to avoid continued weakness in the labor market. just as others have argued for immediate action to curb inflation.

“It’s thought that the time to support the labor market is when it’s strong, not when you start seeing layoffs,” Powell said.

‘IN BUNGA’

The Fed has kept its policy rate at 5.25%-5.50% since last July, when it ended an 18-month rate hike aimed at controlling inflation, which rose to a 40-year high in 2022. .

Powell declined to declare victory, but said inflation is now close to the Fed’s 2% target, and labor conditions are consistent with the central bank’s other goal of higher employment.

US stocks gained after the release of the statement and revised economic forecasts for the quarter before reversing course to close lower for the day. The US dollar .DXY was slightly stronger against a basket of currencies, while yields on US Treasuries rose.

Futures traders estimates have moved in the rate more easily than the Fed expected, and the policy rate is now expected to be in the 4.00%-4.25% range by the end of this year.

“The Fed ended the suspension. It is a strong indication that they have cut by 50 points and expect another 50 points of cuts this year. This was controversial,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Inflation, based on the Fed’s preferred rate, is currently about half a percentage point above the 2% level, and new economic projections now show the annual rate of increase in the price index for personal consumption costs falling to 2.3% by the end of this. year decreased to 2.1% by the end of 2025. The unemployment rate is seen ending this year at 4.4% and will remain there until 2025. the last round of speculation released in June. – Reuters