Interest Rates Today: What You Need to Know About Current Trends

The Federal Reserve cuts interest rates by half a percentage point, marking a bold beginning to its first rate reduction strategy in four years.

The Federal Open Market Committee decided to reduce its key overnight borrowing rate by half a percentage point, or 50 basis points, due to indications of easing inflation and a weakening labor market. This marked the first rate cut since the initial phase of the Covid pandemic. Aside from the emergency rate cuts during Covid, the last time the FOMC lowered rates by half a point was in 2008 during the global financial crisis.

WASHINGTON – On Wednesday, the Federal Reserve implemented its first interest rate cut since the onset of the Covid pandemic, reducing benchmark rates by half a percentage point to counter a weakening labor market.

With both employment and inflation slowing, the Federal Open Market Committee (FOMC) decided to lower its key overnight borrowing rate by 50 basis points, aligning with market expectations that had shifted from a smaller anticipated cut.

Aside from emergency cuts during Covid, the last time the FOMC reduced rates by half a point was in 2008 during the global financial crisis.

This decision brings the federal funds rate down to a range of 4.75%-5%. While this primarily influences short-term borrowing costs for banks, it also affects consumer products like mortgages, auto loans, and credit cards.

Additionally, the committee signaled through its "dot plot" a projection of 50 more basis points in cuts by the end of the year, in line with market expectations. Officials also forecast a further full percentage point in cuts by the end of 2025 and a half-point reduction in 2026. Overall, the dot plot suggests the benchmark rate will decrease by around 2 percentage points beyond Wednesday’s move.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent and believes that the risks to its employment and inflation goals are roughly balanced,” the post-meeting statement said.

The decision to ease was made "in light of progress on inflation and the balance of risks." The FOMC voted 11-1 in favor, with Governor Michelle Bowman advocating for a smaller quarter-point cut. Investors are eager for more insights from Chair Jerome Powell during his 2:30 p.m. ET press conference.

Market trading was volatile after the announcement, with the Dow Jones Industrial Average surging as much as 375 points before stabilizing as investors processed the news and its economic implications.

In evaluating the economy, the committee noted that “job gains have slowed and the unemployment rate has risen slightly but remains low.” FOMC officials raised their unemployment forecast for this year to 4.4%, up from the 4% projection in June, and lowered the inflation outlook to 2.3%, down from 2.6%. Core inflation was also revised down to 2.6%, a 0.2 percentage point drop from June.

The committee expects the long-run neutral rate to settle around 2.9%, a figure that has increased as the Fed continues its effort to bring inflation down to 2%.

Despite these moves, most economic indicators remain strong. Gross domestic product (GDP) has been growing steadily, with the Atlanta Fed forecasting 3% growth in the third quarter, driven by robust consumer spending. The Fed's rate cut comes even though inflation, though declining, is still above its 2% target, with the central bank's preferred measure showing inflation around 2.5%.

However, Powell and other policymakers have voiced concerns about the labor market. While layoffs have remained low, hiring has slowed significantly. The last time the hiring rate was this low, at 3.5% of the labor force, the unemployment rate exceeded 6%.

During his press conference after the July meeting, Powell stated that a 50 basis point cut was “not something we’re considering right now.”

For the time being, this decision helps resolve the debate over how aggressive the Fed should have been with its initial move. 

However, this move raises questions about how much further the central bank will go before it stops cutting rates. There is significant variation among FOMC members regarding their projections for future rate levels.

Investor sentiment fluctuated in the days leading up to the meeting. In the past week, the odds shifted toward a half-point cut, with a 63% chance of a 50-basis-point reduction just before the announcement, according to the CME Group’s FedWatch tool.

The Fed last cut rates on March 16, 2020, as part of an emergency response to the economic shutdown caused by the spread of Covid-19. Rate hikes began in March 2022 when inflation surged to a 40-year high, with the last rate increase in July 2023. During that cycle, the Fed raised rates by 75 basis points four times in a row.

Currently, the unemployment rate stands at 4.2%, having risen slightly over the past year but still within the range considered full employment.

As the Fed holds a central position in the global financial system, Wednesday’s decision is expected to influence other central banks, many of which have already begun cutting rates. Global inflation was largely driven by pandemic-related factors, including disrupted supply chains, higher demand for goods over services, and large-scale monetary and fiscal stimulus.

The Bank of England, the European Central Bank, and Canada’s central bank have all recently reduced rates, while others waited for the Fed's signal.

Although the Fed approved the rate cut, it continues to gradually reduce its bond holdings under a program known as "quantitative tightening." This has brought the Fed’s balance sheet down to $7.2 trillion, a $1.7 trillion reduction from its peak. The Fed is allowing up to $50 billion a month in maturing Treasurys and mortgage-backed securities to roll off, down from $95 billion when QT first began.

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