Fed offers big rate cut, signals focus on cooling labor market

The Federal Reserve made a huge interest rate cut on Wednesday, while hinting at further cuts through the end of the year and beyond and reiterating its intention to focus on maximum employment in the labor market.

The Federal Open Market Committee, which sets monetary policy, cut its key lending rate by 50 basis points, or half a percentage point, to between 4.75% and 5%, the first cut since February 2020, as of the central bank’s two-day policy. meeting in Washington.

The Fed’s new Summary of Economic Projections, better known as Dot Plots, now suggests a federal funds rate of around 4.4% by the end of the year, a level that points to at least two more quarter-point cuts and 3.4% by the end of the year. the end of 2025.

“The committee aims to achieve a maximum level of employment and inflation at a rate of 2 percent over the long term,” the Fed said in a statement released with the rate decision.

“The Committee has gained greater confidence that inflation is moving sustainably towards 2% and believes that the risks to achieving the employment and inflation targets are roughly in balance,” the statement said. “The economic outlook is uncertain, and the Committee is mindful of the risks to both sides of its dual mandate.”

Federal Reserve Chairman Powell will add more details to the central bank’s policy path when he speaks to the media in Washington later this afternoon.

Chip Somodevilla/Getty Images

US stocks extended gains after the Fed statement and Chairman Jerome Powell’s press conference, which starts at 2:30pm EST. The last S&P 500 was marked 35 points, or 0.6%, higher on the session.

Meanwhile, the technology-focused Nasdaq was up 144 points, or 0.81 percent, while the Dow was last traded up 205 points.

Related: Fed Dot Plot Is More Important Than A Rate Cut Today

Yields on the benchmark 10-year Treasury note were last marked 1 basis point higher on the session at 3.666%. Meanwhile, rate-sensitive 2-year note yields were little changed from earlier at 3.592%.

“Unsurprisingly, and after much foreshadowing this summer, the long-awaited start of an interest rate cut cycle is nigh,” said Greg Davis, president and CIO at Vanguard.

“While this is the first appearance of a rate cut since the pandemic, I urge investors to keep in mind that the rate cut cycle can lead to market volatility, so it’s important that investors remain focused on their long-term goals.”

Investors were divided on the size of the Fed’s much-anticipated tapering following a series of summer jobs reports and subdued inflation and comments by Chairman Powell that “the time has come” to lower borrowing costs during his speech at the annual central bank retreat in Jackson. Hole.

Still, with the economy growing at an estimated 3 percent, according to the Atlanta Fed’s recently updated GDPNow forecasting tool, headline inflation fell to a three-year low of 2.5 percent last month and the rate with unemployment hovering at just 4.2%, the case for aggressive Fed action was difficult to make.

Inflation growth is not yet at the Fed’s target for price stability, the unemployment rate is still around 4 percent and federal deficit spending continues to rise, John Lynch, chief investment officer for Comerica Wealth Management in Charlotte, said before the decision Fed.

“In this environment, we believe the more prudent policy action is to resist market pressure and proceed slowly, with a quarter point lower today, followed by moves of a similar magnitude in the next three to four policy meetings in early 2025,” he said. added.

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