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The Federal Reserve raised eyebrows Wednesday with a bigger-than-expected cut in a key interest rate, a move that could fuel speculation about the trajectory of the U.S. economy headed into the November presidential election.
The central bank decreased the rate at which banks lend to each other overnight from a range of 5.5% to 5.25% by a half-percentage point to 5% to 4.
75%. Many Wall Street economists had been expecting a smaller quarter-point cut as the start of a small cycle of similar cuts in the coming months. In a post-meeting statement, the Fed panel that decides monetary policy said the risks of inflation reigniting and unemployment growing were “roughly in balance.
” The size of the cut was not a total surprise to Wall Street. Bond traders had been looking to a half-point reduction last week before expectations fell back again closer to a quarter-point cut, according to Reuters . The cut puts an emphatic end to the Fed’s fight against inflation, which led it to raise rates from near zero to above 5% in 2022 and 2023, sparking fears of a recession.
But the economy defied expectations in 2023 by continuing to grow robustly. The Fed’s action Wednesday, though, may be seen as either trying to show it is as willing to pump up the economy as it was to slow it when inflation was high or that the economy is closer to stalling out than widely believed. Fear financial markets would see a half-point cut as signaling worries about the economy was why a smaller decrease had been expected.
“It’s possible that a large rate cut could cause equity markets to fall and credit spreads to widen which, all other things being equal, would tighten financial conditions. This would evidently be self-defeating,” wrote Neil Shearing , group chief economist with London-based analysis firm Capital Economics on Monday. But the initial reaction in the stock market was positive, with the Dow Jones Industrial Average jumping sharply on the news before falling back.
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Already contributed? Log in to hide these messages. The cut came after joblessness in August was reported at 4.2%, low by historical standards but up from the sub-3% rates seen from 2022 through early 2024.
At the same time, inflation readings have been tame, which led the Fed policy panel to say that it had “greater confidence that inflation is moving sustainably toward 2 percent,” the central bank’s target. Rep. Brendan Boyle (D-Pa.
) called the cut a win for working families. “With inflation firmly in decline, the data supporting a rate cut has long been clear — and I’m glad the Federal Reserve has finally taken action to preserve our hard-fought economic recovery,” he said in a statement. But Republicans are unlikely to see it the same way.
Former President Donald Trump , campaigning for the White House while continuing to await sentencing on felony convictions in New York state, said Tuesday at an event in Michigan that the Fed would have no choice but to cut on Wednesday. “The reason is because the economy’s not good. Otherwise, you wouldn’t be able to do it,” he said.
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