The US Federal Reserve (Fed) moved aggressively, cutting interest rates by 50 basis points to a range of 4.75% – 5%, in the first rate cut since the start of Covid-19.

As the Fed said in its statement, recent indicators show that economic activity continued to expand at a steady pace. Job growth has slowed and the unemployment rate has risen, but remains low. Inflation has made further progress towards the 2% target, but remains somewhat elevated. The Commission has become more confident that inflation is moving steadily towards 2% and considers that the risks to the achievement of its employment and inflation targets are broadly balanced.

In any case, the Commission now estimates with greater certainty that inflation will fall faster than it had forecast, to fall to 2.1% in 2025. On the other hand, it has revised upwards its forecast for unemployment, estimating that it will rise to 4.4% this year (from 4.2%) and in 2025.

It will cut another 50 basis points this year

Meanwhile, policymakers see the Fed’s benchmark rate cut by another 50 basis points by the end of the year, by one percentage point in 2025 and by half a percentage point in 2026, to a range of 2.75%-3.00 %.

The endpoint reflects a slight upgrade, from 2.8% to 2.9%, which is considered a “neutral” stance that neither encourages nor discourages economic activity.

“1 against”

The decision to cut interest rates was not unanimous, as it was taken by a vote of 11 to 1. Republican Michelle Bowman, who was appointed by Donald Trump in 2018, argued that the reduction should be smaller, by a quarter of a point.

Movement – milestone

Although the rate cut was largely expected, economists characterize it as a milestone both in terms of the US central bank’s long-term battle with inflation, but also in terms of the battle that Americans have been fighting for the past two years with the higher cost of living.

Investors and analysts, however, were divided on whether the Fed would cut interest rates by 25 or 50 basis points. This is because, as they say, although the Fed usually leaves a mark on its intentions, this time its messages were not clear.

“Although consensus estimates call for a 50 basis point cut, we expect the Fed to cut rates by 25 basis points on Tuesday. Inflation has not yet reached the central bank’s target, unemployment remains around 4% and spending and the federal deficit continue to grow” he had stated before the official announcements John Lynch, Chief Investment Officer of Comerica Wealth Management;

As reported earlier, the Fed had lagged behind other central banks, which have already reduced interest rates such as the ECB, the Central Bank of England, Canada, Mexico, Switzerland and Sweden.

Many of the aforementioned Central Banks appeared willing to move ahead of the Fed in response to slowing growth and easing inflationary pressures.

It is recalled that last week the ECB proceeded with the second interest rate cut for this year. Specifically, it cut interest rates by 25 basis points, with the deposit facility rate falling to 3.50%, while the main refinancing rate and the marginal financing facility rate were reduced to 3.65% and 3.90%. respectively.

The Fed’s next meeting is after the November election.