The Federal Reserve on Wednesday cut interest rates by half a percentage point, or 50 basis points, marking their first rate cut in four years.
The decision lowers the federal funds rate to a range between 4.75 percent to 5 percent.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low,” the Federal Reserve said in a statement. “Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
The cut of half a percentage point means lower borrowing costs for Americans, applying to car loans, home mortgages, and credit cards.
The Federal Reserve, however, maintained caution in its decision and cited economic uncertainty in its announcement.
The central bank’s Federal Open Market Committee (FOMC) voted 11–1, with Governor Michelle Bowman supporting a quarter-point rate cut.
“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the Federal Reserve said in the statement.
The Federal Reserve last cut rates in March 2020 in an emergency response to the economic shutdown prompted by the COVID-19 pandemic.
Federal Reserve Chair Jerome Powell said during a press conference that the Fed’s policy stance had to be recalibrated to “something more appropriate” given the progress on inflation and employment.
The balance of risks is now even, Powell said.
“This recalibration will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation,” he said.
Powell called the decision to cut interest rates by half a percentage point a “good, strong start,” adding that the labor market is in “solid condition,” the U.S. economy is in “good shape” and “growing at a solid pace” with inflation coming down.
He said the central bank is moving at a pace it deems appropriate.
“I do not think anyone should look at this and say this is the new pace,” he said.
If the labor market were to slow unexpectedly, the Federal Reserve would react to that, Powell said.
The FOMC will carefully assess incoming data and is prepared to adjust the stance of monetary policy if any risks emerge, he said.
He was asked about the deeper implications of a rate cut during an election season.
“This is my fourth presidential election at the Fed,” Powell said. “Our job is to support the economy on behalf of the American people.”
President Joe Biden praised the decision.
“We just reached an important moment: Inflation and interest rates are falling while the economy remains strong,” Biden wrote in a post on X. “The critics said it couldn’t happen – but our policies are lowering costs and creating jobs.”
Biden also said he will speak about the interest rate cuts on Thursday.