US interest rates cut for first time in four years
The Federal Reserve has cut interest rates by half a percentage point and signalled further reductions in an attempt to prevent a slowdown in the world’s largest economy.
The federal open market committee’s decision to lower the cost of borrowing to a range of 4.75 to 5 per cent was the first reduction for more than four years.
In a statement it said it had “gained greater confidence that inflation is moving sustainably towards 2 per cent, and judges that the risks to achieving its employment and inflation goals are roughly in balance”.
Michelle Bowman became the first Fed policymaker to dissent from a rate decision since 2005.
• UK interest rates held at 5%
Policymakers forecast that the benchmark rate of the Fed, whose board is chaired by Jerome Powell, will fall by another half of a percentage point by the end of this year, another full percentage point in 2025 and by a final half of a percentage point in 2026 to end in a 2.75 to 3 per cent range.
“This recalibration of our policy stance will help maintain the strength of the economy and the labour market and will continue to enable further progress on inflation as we begin the process of moving towards a more neutral stance.” Powell said.
“The Fed ended the pause with a bang,” Brian Jacobsen, chief economist at Annex Wealth Management, an investment adviser, said. “It’s a strong signal that they cut by 50 basis points and expect another 50 basis points of cuts this year. This was controversial.”
On Wall Street, after a mixed start to the trading day, indices picked up following the Fed decision, touching new highs. However, a late afternoon sell-off left the Dow Jones industrial average down 103.08 points, or 0.3 per cent, at 41,503.10, while the S&P 500 fell 0.3 per cent to 5,618.26. The technology-biased Nasdaq dropped 0.3 per cent to 17,573.30.
The dollar fell against a basket of major currencies with sterling, the best-performing G10 currency of the year, rising 0.84 per cent to $1.327. The yield on the benchmark 10-year Treasury bond rose 4.7 basis points to 3.688.
George Lagarias, chief economist at Forvis Mazars, the audit and consultancy group, said: “The Fed took a bold step, considering that services inflation is still much higher than average and that the US economy depends on China to continue deflating goods. The US central bank is now committed, in the eyes of markets, to reduce rates quickly.
“A paced approach would have allowed it to manoeuvre in case prices didn’t stabilise at the desirable pace. A double cut necessitates further aggressive moves, and leaves little room to manoeuvre in case prices rebound.”
After the bumper rate cut, Powell said that the Fed was not considering stopping the run-off of its balance sheet, adding that it was possible to take this decision and reduce rates at the same time.
