Washington – The U.S. Federal Reserve made a bold move on Wednesday as it cut its benchmark interest rate by an unprecedented half-point. This decision comes after more than two years of high rates that helped control inflation but also made borrowing extremely costly for American consumers.
The rate cut, which is the first in over four years, reflects the Fed’s new focus on strengthening the job market, which has shown signs of slowing down. With the presidential election just weeks away, this move has the potential to greatly impact the economic landscape, just as Americans prepare to cast their votes.
The central bank’s action has lowered its key rate to approximately 4.8%, down from a two-decade high of 5.3%. For 14 months, the Fed struggled to control the worst inflation streak in four decades. However, inflation has dropped from a peak of 9.1% in mid-2022 to a three-year low of 2.5% in August, which is not far from the Fed’s target of 2%.
In a statement, the Fed expressed confidence that inflation is moving towards the desired 2%. This is a significant step towards declaring victory over inflation. However, many Americans are still struggling with high prices for essential goods such as groceries, gas, and rent. Former President Donald Trump has blamed the current administration for the inflationary surge, while Vice President Kamala Harris has accused Trump of causing prices to rise by imposing tariffs on all imports.
The rate cuts by the Fed are expected to lower the cost of borrowing over time, which will benefit Americans in various ways. Mortgage, auto loan, and credit card rates are expected to decrease, which will provide financial relief to individuals and families. Homeowners will be able to refinance their mortgages at lower rates, reducing their monthly payments. Businesses will also have access to cheaper credit, which will encourage investment and boost growth.
Freddie Mac reports that average mortgage rates have already dropped to an 18-month low of 6.2%, leading to a surge in demand for refinancing. This will not only benefit homeowners but also stimulate the housing market, which has been struggling in recent years.
The Fed’s next policy meeting is scheduled for November 6-7, immediately after the presidential election. By cutting rates this week, just before the election, the Fed is risking criticism from Trump, who believes that this is a political move. However, according to Politico, even some key Senate Republicans have expressed support for a rate cut this week.
In 2022 and 2023, the central bank raised its key rate 11 times in an effort to control high inflation. However, wage growth has slowed down, removing one of the potential sources of inflationary pressure. Additionally, oil and gas prices are falling, which indicates that inflation is expected to continue cooling in the coming months. Consumers are also pushing back against high prices, forcing companies like Target and McDonald’s to offer deals and discounts.
Despite strong job growth in recent years, employers have started to slow down hiring, and the unemployment rate has risen by almost a full percentage point from its half-century low in April 2023 to 4.2%. However, Fed officials and many economists believe that this increase in unemployment is primarily due to an influx of people entering the job market, such as new immigrants and recent college graduates, rather than layoffs.
The Fed’s main concern now is how quickly it should lower its benchmark rate to a level where it no longer acts as a hindrance or a catalyst for the economy. The exact level of this so-called “neutral” rate is still unclear, but many analysts estimate it to be between 3% to 3.5%.
In conclusion, the Fed’s decision to cut its benchmark interest rate by half a percentage point is a significant step towards stabilizing the economy and boosting growth. It reflects the central bank’s commitment to strengthening the job market and controlling inflation. This move will have a positive impact on the lives of Americans, providing relief from high borrowing costs and encouraging spending and investment. As we approach the presidential election, the Fed’s decision may face criticism, but it is a necessary step towards ensuring a stable and prosperous economy for all.
