The Federal Reserve made its first interest rate cut since the early days of the COVID-19 pandemic, reducing its key overnight borrowing rate by half a percentage point, or 50 basis points.
This move, which brings the federal funds rate down to a range of 4.75 to 5 percent, comes as the central bank responds to signs of moderating inflation and a softening labor market. Outside of the emergency rate cuts during the pandemic, the last time the Federal Open Market Committee (FOMC) implemented a cut of this size was in 2008, during the global financial crisis.
Despite steady economic growth and resilient consumer spending, the FOMC responded to evolving conditions, particularly the slowing pace of job gains and rising unemployment, now at 4.2 percent (2.8 percent in Maryland).
The committee noted that while inflation has progressed toward its 2 percent target, it remains elevated, warranting further caution. FOMC members lowered their inflation projection to 2.3 percent and raised their unemployment outlook to 4.4 percent by year’s end.
According to the FOMC statement:
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
Investors widely anticipated the half-point reduction, as market sentiment had shifted in recent weeks in favor of a more aggressive rate cut. The decision also aligns with global trends, as other central banks, including the Bank of England and the European Central Bank, have similarly begun easing monetary policies in response to inflationary pressures.
Alongside the rate cut, the Fed continues its quantitative tightening (QT) efforts, allowing up to $50 billion in maturing Treasurys and mortgage-backed securities to roll off its balance sheet monthly. This process has reduced the Fed’s balance sheet by $1.7 trillion since QT began, even as it adjusts interest rates to manage the economy.
Though the Fed’s decision marks a notable step in addressing inflation and employment concerns, the outlook for additional cuts remains uncertain. FOMC members have signaled differing views on how far to go with rate reductions through 2025. As global financial conditions remain fluid, the Fed’s actions will continue to have significant ripple effects on domestic and international markets.
