US Federal Reserve cuts interest rates

In a highly anticipated move, the US Federal Reserve cut interest rates yesterday for the first time in four years, signalling a shift in its monetary policy aimed at providing relief to the slowing economy. The decision comes as concerns about weakening growth and persistent inflation pressures continue to challenge policymakers.

The Federal Open Market Committee (FOMC) voted to reduce the federal funds rate by half a percentage point, bringing the benchmark lending rate to a range of 4.75% to 5.00%. This marks the first rate cut since 2020, when the Fed slashed rates to near zero in response to the COVID-19 pandemic.

Federal Reserve Chair Jerome Powell said during a press conference on Wednesday that the interest rate cut is designed to maintain the strong US economy.

The cut was made possible by inflation that has fallen from a COVID-19 pandemic high of 9.1% to the current inflation rate of 2.5%.

Powell said he understands the pain many people are experiencing from high prices, but he said the inflation rate is considerably lower now and he believes the lower inflation level is sustainable.

“We had a burst of inflation and many other countries around the world had a similar burst of inflation. Interest rates were raised to reduce inflation,” Powell said. “People don’t experience that as pleasant but, in the end, you get low inflation restored.”

The Fed’s next decision will be announced on November 7, after the US election on November 5. 

The decision came hours before the Bank of England’s latest interest rate-setting meeting today, at which policymakers are expected to hold rates steady after cutting interest rates for the first time in four years in August.

George Lagarias, Chief Economist at Forvis Mazars commented: “The Fed is off to an impressive start. The move comes to the surprise of many investors, who, looking at the benign economic environment, considered that the US central bank would adopt a more paced approach. There are several things that will likely happen as a result in the next few days.

“For one, expectations on future cuts will probably build up from this point forward, pushing bond yields further down and causing more steepening in the yield curve. If the Fed started aggressively there’s no reason why it should not continue in the same direction, the thinking will likely go.

“Second, investors will have to consider whether the US economy and thus earnings are more stressed than what they appear to be. A central bank cutting aggressively could, even inadvertently, emit a distress signal to markets.

“Third, the move could become an issue in the presidential campaign, further fuelling a discussion as to future of the central bank’s independence.

“Fourth, it will send a signal to the Bank of England and the European Central Bank that they should feel free to also cut aggressively, as they try to deal with weak growth conditions.

“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.”

Adrian Li, Managing Director at international corporate finance firm Centrus, noted: “At last, healthier inflation prints have prompted the Fed to cut rates for the first time since 2020 – a move already priced in by markets. While good news for consumers, corporates deciding on whether to lock-in these rates should note that market forwards are already pricing in over 2% of rate cuts to September 2025 – which can be locked-in now by borrowing in fixed, or by hedging forward. Rate expectations could rise again, particularly if U.S. economic data stays strong and inflation fails to fall further. Critically for those deciding to borrow now or wait, rates are only one side of the story – credit margins remain tight at present and capital abundant for the right borrower.”