For the First Time in Four Years, the Federal Reserve Cuts Interest Rates by 50 Basis Points, Marking the Beginning of a Loosening Cycle

Summary: The Federal Reserve announced on the 18th that it has lowered the target range for the federal funds rate by 50 basis points, bringing it down to the range of 4.75% to 5.00%. This is the Fed's first rate cut since March 2020 and marks a shift from a monetary policy tightening cycle to a loosening cycle.

On the 18th, the Federal Reserve announced that it had lowered the target range for the federal funds rate by 50 basis points, bringing it down to the range of 4.75% to 5.00%. This is the first rate cut by the Fed since March 2020, and it signals a shift from a monetary policy tightening cycle to a loosening cycle.

The Fed concluded its two-day monetary policy meeting on the same day. After the meeting, the Federal Open Market Committee (FOMC) released a statement, saying that the committee has "greater confidence" that inflation is sustainably moving toward the 2% target. It also believes that the risks to achieving the dual goals of full employment and price stability are roughly balanced.

At the post-meeting press conference, Federal Reserve Chairman Jerome Powell called the 50-basis-point rate cut a "forceful action" and emphasized that the FOMC does not believe that the rate cut was delayed, but rather sees it as a timely move.

Powell pointed out that the personal consumption expenditures (PCE) price index has fallen from a peak of around 7% to 2.2% in August, indicating that inflation has "significantly eased." The latest economic outlook released by the Fed shows that officials have lowered their median forecast for the PCE price index to 2.3% by the end of this year, down from 2.6% in June.

While inflation has eased, there are signs of weakness in the U.S. labor market. Powell noted that average monthly job growth over the past three months was 116,000, which is significantly slower than earlier this year. Meanwhile, the unemployment rate has risen to 4.2%. According to the latest economic outlook, Fed officials have raised their median forecast for the unemployment rate at the end of this year to 4.4%, up from 4.0% in June, suggesting that the labor market is not as strong as previously expected.

In addition, the economic outlook also shows that 19 members of the FOMC expect further rate cuts by the end of this year, with 9 members forecasting a 50-basis-point cut and 7 members predicting a 25-basis-point cut.

Due to the slower-than-expected decline in inflation, the Fed has kept the federal funds rate target range at 5.25% to 5.5% since the end of July last year, the highest level in 23 years. In recent months, with further easing of U.S. inflation and signs of a weakening labor market, the Fed has faced pressure to shift its policy.