On Wednesday, the US Federal Reserve implemented a half-point reduction in its key lending rate, marking its first cut since the Covid-19 pandemic began. This move, occurring just before the November presidential election, significantly lowers borrowing costs across various sectors, from mortgages to credit cards. The rate cut is anticipated to benefit Democratic candidate Kamala Harris, who aims to emphasize President Joe Biden’s economic achievements in his contest against Donald Trump.
The Fed’s decision, made with an 11-to-1 vote, lowers the central bank’s benchmark rate from 4.75 per cent to 5.00 per cent. The lone dissenting vote came from Fed Governor Michelle Bowman, who favoured a smaller, quarter-point reduction. The Fed stated that its rate-setting committee now has “greater confidence” that inflation is trending towards its 2 per cent target and believes that the risks to achieving its employment and inflation objectives are roughly balanced. Congress has tasked the central bank with managing both inflation and employment independently.
While analysts had anticipated a rate cut, the size of the reduction was uncertain, with some expecting a smaller quarter-point cut and others predicting a larger half-point reduction. The latter carries the risk of reigniting inflation. Updated economic forecasts from the Fed project an unemployment rate of 4.4 per cent for the fourth quarter of this year, up from the previous forecast of 4.0 per cent in June. Inflation is expected to average 2.3 per cent annually, slightly below June’s estimate.
The decision to implement a more substantial cut than initially expected surprised some analysts. Economists at Citi had predicted a 25 basis point cut with a signal of additional reductions later in the year. Although the Fed’s mandate allows it to set monetary policy based purely on economic data, this decision is likely to have political implications, given the high public concern over inflation and living costs ahead of the election. Donald Trump has frequently criticized Fed Chair Powell, suggesting that Fed decisions are politically motivated, a claim the central bank has denied.
