Fed cuts rates by half point in historic policy shift

The Federal Reserve on Wednesday cut its key interest rate by half a percentage point, a historic move that reverses a years-long battle against inflation and could provide relief to borrowers struggling with high costs.

The central bank’s first rate cut since 2020 came after a recent wave of data highlighted key conditions for a rate cut: falling inflation and slower employment growth.

In theory, lower interest rates help stimulate economic activity and increase employment. The Dow Jones Industrial Average rose 200 points immediately after the announcement on Wednesday afternoon.

The S&P 500 and the Nasdaq also rose on the news.

At a press conference in Washington DC on Wednesday, Fed Chairman Jerome Powell described the rate decision as a policy shift by the central bank.

“This recalibration of our policy will help preserve the strength of the economy and labor market and enable further progress on inflation,” Powell said.

“The U.S. economy is in good shape,” Powell added. “We want to keep it there.”

The Federal Open Market Committee, a policy-making body of the Fed, predicted further rate cuts on Wednesday.

By the end of 2024, interest rates will fall nearly another half percentage point from their current level of between 4.75% and 5%, according to FOMC projections. Interest rates will fall another percentage point through 2025, the projections indicated.

Over time, interest rate cuts ease the burden on borrowers for everything from mortgages to credit cards to cars, making it cheaper to get a loan or refinance. The cuts also boost company valuations, potentially helping to boost shareholder returns.

Earlier this year, mortgage rates hit their highest level in more than two decades, while the average rate for credit card holders surpassed anything ever recorded by the Fed. Auto loan rates have risen to levels last seen at the start of the 2008 financial crisis, Edmunds found.

By lowering interest rates, many of these payments will decrease, which will benefit borrowers.

However, borrowers should not expect immediate relief from the Fed’s first rate cut, Elizabeth Renter, chief economist at NerdWallet, told ABC News in a statement ahead of the decision.

“This first rate cut will have little immediate impact,” Renter said. “I expect many consumers and business owners will see the beginning of this change in monetary policy as a sign of hope.”

Inflation has fallen dramatically from a peak of around 9% in 2022, but is still slightly above the Fed’s target of 2%.

Meanwhile, the labor market has cooled, with weaker-than-expected jobs reports in each of the past two months raising concerns among some economists.

“We will do everything we can to support a strong labor market as we make further progress toward price stability,” Powell said last month.

Before the decision, the likelihood of a rate cut was almost certain, according to the CME FedWatch Tool, a gauge of market sentiment.

Market observers were divided, however, over whether the Fed would make the usual quarter-percentage-point cut or go for a larger half-point cut. The tool put the probability of a half-point cut at 65% and the probability of a quarter-point cut at 35%.

A half-percentage point cut would overstimulate the economy and reignite inflation, while a quarter-percentage point cut could slow the economic recovery needed to avert a recession, Seema Shah, chief global strategist at Principal Asset Management, said in a statement to ABC News.

“Rarely have market expectations been so divided” on the eve of a rate decision, Shah added.

Wednesday’s rate cut came less than 50 days before the November election.

The move was a departure from the Fed’s policy approach ahead of many recent presidential elections, a Reuters analysis found. Policy rates were held unchanged for six to 12 months before the 2020, 2016, 2012 and 2000 U.S. presidential elections, Reuters found.

The Fed says it bases its decisions on economic conditions and operates as an independent government agency.

When Powell was asked about the 2024 elections at a press conference in Washington, DC in December, he said, “We don’t think about politics.”