Federal Reserve Cuts Interest Rates by Larger-than-Expected Margin

The U.S. Federal Reserve has initiated a larger-than-usual half-percentage-point interest rate reduction in an effort to sustain low unemployment as inflation has eased. This move marks a significant shift in U.S. monetary policy, with further rate cuts projected for the coming years.

The U.S. central bank on Wednesday launched an anticipated series of interest rate cuts with a significant half-percentage-point reduction, signaling a commitment to maintaining low unemployment now that inflation pressures have decreased. Federal Reserve Chair Jerome Powell emphasized the strength of this initial move during a press conference, underscoring the bank's increased confidence in overcoming inflation. The benchmark policy rate has now been reduced to the 4.75%-5.00% range, aiming to stay ahead of potential job market weakening.

While the decision was broadly supported, it did mark the first dissent from a Fed governor since 2005, with Michelle Bowman advocating a smaller quarter-percentage-point cut. Analysts interpreted this as Powell's strategic push to initiate the cycle of easing decisively. Powell characterized the move as a 'recalibration,' reflecting the sharp decline in inflation and the ongoing strength of the economy. The objective is to avoid trading higher unemployment to meet the 2% inflation target.

Fed policymakers anticipate additional rate cuts, with projections showing a further half-percentage-point reduction by year-end, another full percentage point cut by 2024, and a further half-point in 2026. These forecasts, however, come with caution due to future uncertainties. Despite its proximity to the presidential election, the rate cut has garnered mixed reactions from candidates, with Vice President Kamala Harris viewing it as positive news, while Republican nominee Donald Trump questioned the economic implications. Powell reassured that economic indicators, including unemployment and job market health, remain strong, although preemptive action is necessary to support the labor market.

(With inputs from agencies.)