US Federal Reserve Slashes Rates by Half-Point in First Reduction Since 2020

US Federal Reserve

The U.S. Federal Reserve made a significant move on Wednesday by cutting its key lending rate by half a percentage point, marking the first reduction since the Covid-19 pandemic began.

This move comes just weeks before the November presidential election, significantly lowering borrowing costs across various sectors, including mortgages, auto loans, and credit cards.

This rate cut will influence how commercial banks lend to consumers and businesses, reducing the overall cost of borrowing. The decision is expected to be welcomed by Democratic candidate Kamala Harris, who aims to emphasize the Biden administration’s economic achievements during her campaign against former President Donald Trump.

The Federal Open Market Committee (FOMC) voted overwhelmingly in favor of the rate reduction, with a vote tally of 11-to-1. The cut lowers the U.S. central bank’s benchmark rate to a range of 4.75% to 5%. The sole dissenting vote came from Fed governor Michelle Bowman, who supported a smaller, more traditional cut of a quarter percentage point.

In a statement, the Fed explained that the committee “has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”

This signals a growing sense of stability in the U.S. economy, with inflation easing and the labor market gradually cooling after the post-pandemic boom.

The central bank operates with a dual mandate from Congress to manage inflation and promote full employment, balancing these goals carefully with every rate decision.

Although analysts had widely expected the Fed to cut rates in light of easing inflation and a slowing job market, the size of the cut caught some off guard. While some anticipated a quarter-point cut, the larger half-point reduction introduces the possibility of inflationary pressures reigniting in the future.

According to updated economic forecasts released alongside the rate decision, the Fed now projects an average unemployment rate of 4.4% for the fourth quarter, up from its June projection of 4%. The central bank also anticipates a slight drop in headline inflation, forecasting an annual rate of 2.3%, down from previous estimates.

Citi economists, in a note to investors, had expected a smaller 25-basis-point cut but indicated the Fed would signal further rate reductions this year.

The unexpected half-point cut raised eyebrows among analysts but highlighted the Fed’s commitment to managing inflation while maintaining a steady economic recovery.

While the Federal Reserve is meant to operate independently of political influence, its actions can still impact the political landscape.

With inflation and the cost of living being top concerns for American voters, the timing of this decision is crucial, and it is likely to factor into campaign debates.

President Trump had previously criticized Fed Chair Jerome Powell, accusing the central bank of making politically motivated decisions. However, the Fed has continuously refuted such claims, emphasizing its commitment to economic data and its independent mandate.