Federal Reserve Slashes Interest Rates by Half a Point, Signals Further Cuts Ahead

Federal Reserve Slashes Interest Rates by Half a Point, Signals Further Cuts Ahead

On Wednesday, the Federal Reserve reduced its benchmark interest rate by half a percentage point and signaled that further cuts are likely, initiating its first easing cycle since the pandemic’s onset.

This marked the Fed’s first rate cut in over four years, bringing the federal funds rate to a range between 4.75% and 5%. Michelle Bowman, a Federal Open Market Committee (FOMC) member, voted in favor of a smaller quarter-point reduction, becoming the first Fed governor to dissent on a rate decision since 2005.

The substantial half-point reduction indicates that the central bank is aiming to stay ahead of potential economic and labor market downturns after holding rates at their highest levels since 2001 for more than a year.

The last time the Fed implemented a rate cut of more than 0.25% was during the global economic turmoil caused by the COVID-19 pandemic in 2020.

At a press conference on Wednesday, Fed Chair Jay Powell stated, “The U.S. economy is in a good position, and today’s decision is intended to keep it there. This adjustment to our policy will support the economy’s and labor market’s strength while enabling further progress on inflation, as we begin shifting toward a more neutral policy stance.”

Powell emphasized that the Fed’s rate path was not predetermined, adding that if inflation remained persistent, the central bank could ease policy more slowly. However, he noted that the Fed was also “prepared to act” if the labor market unexpectedly weakened.

“We don’t believe we’re behind in cutting rates,” Powell said. “But consider this a signal of our commitment to stay ahead.”

In its statement, the FOMC expressed increased confidence in the inflation outlook, though it acknowledged that inflation remains “somewhat elevated.”

U.S. stocks surged following the announcement, with the S&P 500 climbing as much as 1.1% at one point. Although the index briefly surpassed its intraday record, it eventually pared gains and ended slightly lower.

The Treasury yield curve steepened, with the gap between 10-year and 2-year bonds—a common indicator of future growth expectations—reaching levels not seen since June 2022. The yield on the two-year Treasury note, which is sensitive to Fed policy changes, initially dropped to 3.59% before rebounding to 3.63%. Bond yields move inversely to prices.

Asian markets opened stronger on Thursday in response. China’s CSI 300 rose 0.8%, Hong Kong’s Hang Seng index advanced 1.8%, and Japan’s Topix gained 2.4%.

The yen weakened to ¥143.2 per dollar after strengthening past ¥140 earlier in the week, as traders anticipated that the Bank of Japan would maintain its current rates at the upcoming policy meeting on Friday.

The Fed’s latest “dot plot” of rate forecasts revealed that most officials expect the policy rate to fall to 4.25%-4.5% by the end of 2024, suggesting another significant half-point reduction at one of the two remaining meetings this year, or two quarter-point cuts. This projection marks a more aggressive stance compared to June’s dot plot, which had suggested only a quarter-point reduction.