The Federal Reserve (FED) made a significant move on Wednesday by cutting interest rates by half a percentage point, marking the first such reduction since the early days of the pandemic. The decision to lower the federal funds rate to a range of 4.75%-5% comes in response to a slowing labour market and softening inflation, aiming to recalibrate the economy amidst a backdrop of global uncertainty.
- Rate Cut: The Federal Reserve enacted a 50 basis point cut, reducing the federal funds rate to 4.75%- 5%.
- Inflation Projection: Core inflation projection lowered to 2.6% from 2.8%, with overall inflation expectations reduced to 2.3% from 2.6%.
- Unemployment Projection: The Fed raised the expected unemployment rate in 2023 to 4.4% from 4%.
- Gross Domestic Product: The Atlanta Fed is tracking 3% growth in Q3 based on strong consumer spending.
- Job Market: The current unemployment rate is 4.2%, up from 3.5%, while the hiring rate is at its lowest at 3.5%.
- Dot Plot Projections: Fed officials predict an additional 50 basis points of cuts by year-end, 100 basis points more by 2025, and another 50 basis points in 2026.
- Treasury Yields: The 10-year yield spiked 7 basis points after the rate cut, signalling concerns about inflation and long-term growth.
- Balance Sheet Reduction: The Fed’s balance sheet has shrunk by $1.7 trillion from its peak, now standing at $7.2 trillion, with $50 billion in maturing assets rolling off monthly.
While the Fed’s decision to implement a larger-than-expected rate cut addresses current concerns about inflation and the labour market, it raises questions about future monetary policy. With more rate cuts anticipated in the coming years, and global central banks closely watching the Fed’s moves, the economic landscape is likely to experience continued adjustments. As inflation slows and unemployment rises, the central bank’s actions will be pivotal in shaping the trajectory of the U.S. and global economies.
