The US central bank (Fed) cut rates for the first time since 2020, hitting hard with a half-point cut, and considering another half-point by the end of 2024, during the last meeting before the US election on November 5.
• Also read: It was time for the United States to lower its key interest rate
This important decision by the Fed comes less than two months before the American election, which will see Democrat Kamala Harris face off against Republican Donald Trump.
Fed rates are now in a range of 4.75 to 5.00%, after spending more than a year at their highest level since the turn of the century, at 5.25 to 5.50%.
The decision was not unanimous at the Federal Open Market Committee (FOMC), with one governor, Michelle Bowman, voting for a cut of only a quarter of a point.
“The Committee has gained greater confidence in the sustained decline in inflation toward 2 percent,” the target level considered healthy for the economy, the FOMC said in its statement.
And more cuts are on the horizon, as Fed officials have signaled they plan to cut rates further by the end of 2024, by another half-point in total.
Slowdown in the job market
In June, the Fed expected to cut rates only once in 2024, by a quarter of a point. But since then, the job market in particular has slowed more than expected, and fears of recession have resurfaced.
Fed Chairman Jerome Powell will provide details at a press conference at 2:30 p.m. local time.
This rate cut, announced during the last Fed meeting before the November 5 election, will restore purchasing power to American households, stuck for several years between high inflation and high credit costs.
The Federal Reserve is independent of political power, but its decision could give Kamala Harris a boost.
Republican candidate Donald Trump, for his part, had judged Tuesday during a meeting in Flint (Michigan) that the Fed could only ease its monetary policy because “the economy is not good, otherwise they would not be able to do it”. The former president had promised to “lower rates” further if he were elected.
Falling inflation
The Fed also revised its inflation forecast downward to 2.1% in 2025, compared to 2.3% expected in the previous forecast in June. Unemployment was revised upward to 4.4% this year and next, compared to 4.0 and 4.2% previously.
Gross domestic product (GDP) growth for 2024 is expected at 2.0% compared to 2.1% previously.
Now that inflation is gradually coming back into line, the Fed wants to prevent unemployment from rising in turn by lowering rates.
The mission of the powerful American Federal Reserve is twofold: to ensure price stability and full employment. “The risks” linked to these two missions are now “roughly balanced,” the FOMC stressed.
“The time has come”
Jerome Powell had warned at the end of August: “the time has come” to ease monetary policy.
The employment situation had in fact been put aside in recent years by Fed officials because the labor market was doing so well.
Inflation continues to slow: the PCE index, which the Fed wants to bring back to 2%, remained stable in July, at 2.5% over a year. The August data will be published on September 27.
The CPI index fell in August to its lowest level since February 2021, 2.5% over a year. As for the unemployment rate, it fell in August, to 4.2%, but job creation is slowing.
Across the Atlantic, the European Central Bank (ECB) cut rates for the second time in three months on Thursday.
