Federal Reserve Surprises With Hefty Interest Rate Cut

The Federal Reserve raised eyebrows Wednesday with a bigger-than-expected cut in a key interest rate, portraying the move as essentially an insurance policy against a possibly slowing economy now that it believes inflation is under control.

But the action, which took many by surprise, also risks putting the independent central bank smack in the middle of the last stretch of the 2024 presidential race, as it will help keep the economic recovery touted by Democrats. But it could also be used by former President Donald Trump to support his gloomy statements about the economy.

“The labor market is actually in solid condition, and our intention with our policy move today is to keep it there. You can say that about the whole economy,” Federal Reserve Chair Jerome Powell told reporters at a press conference following a meeting of the Fed’s rate-setting committee.

“The U.S. economy is in good shape. It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong pace. We want to keep it there. That’s what we’re doing.”

With its first rate cut since March 2020, 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.

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.

Still, the cut puts an emphatic end to the Fed’s recent 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 weaker than widely believed.

But markets took the news mostly in stride. Major stock indexes ended the day close to unchanged, hinting that the move did not shake investors’ confidence in the economy.

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.

Vice President Kamala Harris, Trump’s opponent in the White House race, praised the Fed’s move but said she remained focused on inflation.

“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” she said in a statement.

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.

Trump, in an appearance Wednesday in New York City, reacted negatively to the news.

“The economy would be very bad or they’re playing politics, one or the other. But it was a big cut,” he said.

Trump has said that he thinks the president should have a say in rate policy, even though the tradition of the Fed as an independent entity dates back to the 1950s. On Tuesday night, he said, “They’ll do the rate cut and all the political stuff tomorrow.”

Powell denied that politics entered into the rate decision, which was supported by 11 of the 12 members of the rate-setting committee, with one voting for a smaller cut.

“This is what we do. Our job is to support the economy on behalf of the American people,” Powell said.

“We don’t put up any other filters. I think if you start doing that, I don’t know where you stop. And so we just don’t do that.”