The Federal Reserve System on Wednesday, September 18, decided to cut its benchmark interest rate by a half percentage point.
It is worth noting that most experts and investors expected that the central bank of the United States would begin to ease monetary policy as part of a more moderate approach, providing for less extensive actions in the context of lowering the cost of borrowing. At the same time, the US financial regulator began to apply more decisive measures. According to media reports, the corresponding strategy of the central bank of the United States is largely related to the desire to bolster the labor market.
Projections published following the two-day meeting of the Fed indicate that 10 out of 19 officials support cutting interest rates by at least an additional half-point during the two remaining discussions of monetary policy this year.
The Federal Open Market Committee (FOMC) voted 11 to 1 to lower the federal funds rate to a range of 4.75% to 5%. It is worth noting that for more than a year the corresponding indicator was at a mark that corresponds to the maximum level in the last two decades.
As noted by the media, the decisive decision, which the central bank of the United States announced on Wednesday, should probably be interpreted as a reflection of the significant concern of Fed officials about the state of affairs in the employment area.
The statement of the US financial regulator underlined that the above-mentioned committee has a high level of confidence that inflation is on a trajectory of sustainable movement to the target indicator of 2%. Also in this statement is ascertained the firm intention of officials of the central bank of the United States to make efforts aimed at maintaining maximum employment. The corresponding goal for them is one of the main ones along with ensuring the conditions for inflation to reach the target indicator.
Amid the news about the decision of the central bank of the United States to begin easing monetary policy, the S&P 500 index showed fluctuations between growth and decrease. At the same time, Treasury two-year yields fell on a moderate scale in response to the relevant information about the actions of the US financial regulator.
The median forecast of United States central bank officials is that they will lower borrowing costs by one percentage point next year.
Investors are likely to focus on how the US financial regulator will explain the rapid start of monetary easing. For them, the motivation for changing the indicator is no less important than the figure itself.
Governor Michelle Bowman, according to media reports, was a supporter of a more moderate start to monetary easing. It is worth noting that this is the first dissent from the governor in the last 19 years. Also, this case, there is observed the first dissent from any member of the FOMC since 2022.
United States central bank officials also said that they will consider additional adjustments to borrowing costs. In this case, they will take into account data on the state of affairs in the US economic system, the balance of risks and prospects, which periodically change, forming new potential scenarios of the future. Also, United States central bank officials in their collective statement noted that inflation in the country continues to be somewhat elevated. Separately, they mentioned the slowdown in employment growth in the US.
Also, officials of the central bank of the United States updated their economic forecasts. According to them, as of the end of the current year, unemployment in the country will be recorded at 4.4%. It is worth noting that the version of the forecast that was published in June provided that the corresponding figure would be 4%. This means that officials of the central bank of the United States expect the situation in the labor market to worsen. Currently, the unemployment rate in the US is at 4.2%. Last month, Fed Chairman Jerome Powell described an unwelcome implementation of such a scenario on the labor market, which provides for the so-called cooling of the corresponding space.
The median forecast for the dynamic of inflation at the end of the current year, published by the central bank of the United States, provides that the corresponding figure will be recorded at 2.3%. Also, Fed officials still do not expect inflation in the US to reach the target level of 2% until 2026.
Besides, the central bank of the United States published the median forecast for the country’s economic growth. Fed officials expect the corresponding indicator to increase by 2% in 2024.
At the same time, the central bank of the United States revised its forecast for the long-run federal funds rate upward to 2.9% from 2.8%.
The decision of the US financial regulator, taken on Wednesday, actually means what can be described as a new stage in the history of this financial institution. The Fed begins a period of monetary easing after two years of aggressive measures within the framework of the corresponding activity line. At the beginning of 2022, the central bank of the United States began to implement a strategy of sharply increasing the cost of borrowing. The corresponding actions of the US financial regulator were aimed at overcoming the upward trajectory of inflation, which was largely associated with shock factors formed during the coronavirus pandemic, which in a sense became a stress test for the economy both globally and at the level of individual countries. The central bank of the United States, by aggressively raising interest rates, fought against intense price growth, which was the result of the combined effect of such circumstances as disruptions in international supply chains and increasing demand from locked-down consumers. It is worth noting that the mentioned facts of production and overall economic reality are the consequences of the measures taken to counter the spread of coronavirus. The corresponding measures limited slowed down, or completely stopped many processes on a global scale.
In the United States, against the backdrop of the impact of the circumstances of the configuration of economic reality formed by the conditions of the world’s response to the coronavirus pandemic, inflation reached a level that turned out to be the highest since 1981. The Fed perceived this challenge as a sufficient argument to begin implementing a strategy of aggressive tightening of monetary policy. As part of the corresponding fight against inflation, the central bank of the United States raised interest rates 11 times. Against the backdrop of the implementation of these measures, in July 2023, the cost of borrowing in the US reached a two-decade high.
It is worth noting that the aggressive actions of the central bank of the United States to combat inflation were not in vain. In June 2022, the corresponding figure was at 9.1%. Towards the end of summer 2024, inflation in the United States decreased to 2.5%. In this case, a clearly positive result and obvious progress in the movement towards the Fed’s 2% target are recorded. The corresponding achievements have strengthened the US financial regulator’s belief that as of September 2024, the circumstances and factors shaping the state of affairs in the country’s economic system are favorable for the start of monetary policy easing.
At the same time, a weakening labor market is recorded in the United States. However, this situation is not a signal or sign that the country’s economic system is in the space of implementing a recession scenario or is approaching the materialization of the corresponding state of affairs. Currently, the number of layoffs in the United States remains low. Consumers continue to spend money. This means that the outlook for the US economic system as a whole is positive and does not contain a reason for extreme or even moderate alarmism.
Jerome Powell said on Wednesday that the US central bank is in no hurry in the context of actions to ease monetary policy. According to him, the corresponding process is evolving over time. He made the corresponding statement during a press conference following the Fed’s meeting on monetary policy.
Also on Wednesday, Jerome Powell commented on the state of affairs in the labor market. According to him, at present, there is a situation in this area that indicates a solid condition. Moreover, the Fed Chairman positively assessed the current state of affairs in the economic system of the United States. According to him, the country’s economy is in good shape. In this context, he drew attention to such favorable factors as confident economic growth and the downward dynamic of inflation.
In addition, Jerome Powell said on Wednesday that at present, the goal of the central bank of the United States is to keep inflation at a stable level and at the same time not allow the unemployment rate to rise. In this context, he noted that the US financial regulator is trying to achieve a situation in which price stability will be restored without the painful deterioration of the situation in the employment area, which sometimes comes with disinflation. Jerome Powell also said that investors should take the Fed’s 50 basis-point rate cut as a sign of its strong commitment toward achieving that goal.
As we have reported earlier, ECB Cuts Interest Rates Again.
