Key points:

  • The U.S. Federal Reserve has started reducing interest rates, beginning with a larger-than-usual cut.
  • The Fed forecasts further rate cuts in the coming years.
  • The regulator notes that inflation is approaching the target rate of 2%.

Starting with a more substantial-than-usual rate cut of 0.5%, the Federal Reserve initiated a cycle of monetary easing on Wednesday. According to Fed Chair Jerome Powell, this decision was made to maintain low unemployment amid decreasing inflationary pressure.

Decisive actions by the U.S. regulator

By deciding to lower the base rate by half a percentage point on Wednesday, the Federal Reserve members also presented a forecast for further monetary policy easing. According to these forecasts, by the end of the current year, the rate could decrease by another half a percentage point, by a full percentage point next year, and by another half a percentage point in 2026. However, Fed representatives emphasized the high degree of uncertainty in long-term forecasts.

This decision indicates a significant shift in U.S. monetary policy and reflects the growing confidence of the regulator that inflation will continue to decline towards the target level, which is currently exceeded by approximately half a percentage point.

Despite the fact that the Fed’s policy decision was made just seven weeks before the U.S. presidential election, it initially sparked a relatively muted reaction from the presidential candidates.

Vice President Kamala Harris, the Democratic Party’s presidential candidate, called the rate cut “good news” for Americans.

Republican candidate Donald Trump, who as president first appointed Powell as head of the Fed, said that the size of the cut suggests the economy might be in trouble.

However, Powell said that the economy remains strong, and many labor market indicators, such as unemployment claims and even the current unemployment rate of 4.2%, are not at worrying levels.

But he acknowledged the same concerns raised by economists and analysts regarding inflation: that it takes time for changes in monetary policy to have an effect, and that, considering anecdotal information from companies and the slowdown in hiring, officials felt it was necessary to prevent further weakening of the labor market, just as others argued for swift actions to prevent inflation.

The Fed is closely watching inflation

Since last July, the Federal Reserve had kept the interest rate in the range of 5.25% to 5.50%, thus ending an 18-month cycle of rate hikes aimed at curbing inflation, which in 2022 reached a 40-year high.

Powell refrained from declaring a complete victory over inflation but noted that inflation is now approaching the Fed’s target of 2%, while labor market conditions align with the central bank’s other goal—maximum employment.

The Fed’s decision initially led to a rise in U.S. stocks, but indices later closed lower. The U.S. dollar slightly strengthened against a basket of currencies, and U.S. Treasury bond yields increased.

According to the Fed, core inflation currently exceeds the target level by about half a percentage point. Updated economic forecasts indicate a decline in the annual growth rate of the personal consumption expenditures price index to 2.3% by the end of this year and to 2.1% in the subsequent period.