By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News. September 19, 2024. Article no 1232.
Photo : Jerome Powell, the Chairman of the U.S. Federal Reserve, on September 19.
The Federal Reserve has made a significant move by cutting its benchmark interest rate by half a percentage point, lowering it to a range of 4.75% to 5%. This decision, made during the Federal Open Market Committee (FOMC) meeting on September 18, 2024, marks the first reduction since early 2020 and is part of a broader strategy to support the labor market amid signs of economic cooling.
The long-anticipated pivot followed an all-out fight against inflation that the central bank launched in March 2022.
The cut amounts to a declaration of victory over inflation, which has come down from a peak of 9.1% in June 2022 to 2.5% last month.
The Fed signaled that it will cut the rate by another half a percentage point this year and expects four more cuts in 2025 and two in 2026.
Reason for the Cut
The Fed’s decision comes as officials express concerns about a potential slowdown in the labor market. Although inflation has decreased to approximately 2.5%, slightly above the target of 2%, there are indications that job gains have slowed and the unemployment rate has risen to 4.2%.
Future Projections
The FOMC anticipates additional cuts, projecting another half-point reduction by the end of this year and further cuts into 2025 and 2026, ultimately aiming for a long-term neutral rate around 2.9%.
Dissenting Opinion
Notably, Governor Michelle Bowman dissented from the majority decision, advocating for a smaller cut of just 0.25 percentage points, reflecting differing views within the committee regarding the pace of monetary easing.
Market Reaction
Following the announcement, there was considerable volatility in financial markets, with investors reacting positively to the news as it indicates a shift in monetary policy aimed at fostering economic growth while managing inflation.
Lower Mortgage Rates
One of the most direct consequences of the Fed’s rate cut is the likelihood of lower mortgage rates. Historically, a 100-basis point cut in the federal funds rate has led to an approximate 87-basis point decrease in mortgage rates. Given the Fed’s current cut, analysts suggest that mortgage rates could drop to around 5.9% by the end of the year.
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This rate cut is seen as a proactive measure to prevent a deeper economic slowdown and is expected to ease borrowing costs for consumers and businesses alike.
Gold price surged, hit $ 2,612 per troy ounce after the announce of the Fed cut. This marked a continuation of a robust upward trend for gold, which has seen prices increase over 25% this year due to various factors, including strong demand from central banks and investors seeking safe-haven assets amidst economic uncertainty.
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