The U.S. central bank has initiated an anticipated series of interest rate cuts, with a larger-than-usual 50 basis point rate cut in its September meeting, marking the first reduction in four years and aiming to ease borrowing costs for consumers struggling with high mortgage and credit card rates. This decision was based partly on the central bank's confidence that inflation will soon reach policymakers' goal of a 2% annual rate and cooling employment. The labor market remains solid, though not as hot as it was during the pandemic, when labor shortages drove up wages and some businesses found it difficult to find new workers.
The Federal Open Market Committee (FOMC) has raised its expected unemployment rate to 4.4% this year and lowered the inflation outlook to 2.3% from the previous projection. The committee expects the long-run neutral rate to be around 2.9%, a level that has drifted higher as the Fed struggles to get inflation down to 2%. The Atlanta Fed is tracking 3% growth in the third quarter based on continuing strength in consumer spending. After recent, above expectation retail sales data and strong GDP forecast, a question arises that why has Fed opted for 50 bps rate cut and not 25 bps cut when the economy is on solid footing.
The Fed chair was asked on the need for aggressive rate cut and Powell cited that the decision was in light of the progress seen on inflation m-o-m and the committee has gained greater confidence that inflation is moving sustainably toward 2%,. The risks to achieving its employment and inflation goals are roughly in balance. The chair made an interesting comment in regards to labor market. Powell said “There is thinking that the time to support the labor market is when it is strong, and not when you begin to see layoffs”. As fed has hold on for too long in comparison to other central bankers, the Fed's attention now is toward preserving the health of the labor market and preventing unnecessary damage to the economy from its restrictive policy stance.
This decision is seen as a sign of confidence in the economy and its people, as the central bank is expected to make more rate cuts in 2024. Central bankers expect to cut interest rates more in the months to come, but the path is not yet set. Rate cutting path will be data driven, if the data decorates, the committee could speed up and slow down if it is strong. The ripple effects of the Fed rate cut will be felt globally, particularly in emerging markets like India.
The move comes just weeks before the presidential election, and questions were raised regarding potential to scramble the economic landscape just as Americans prepare to vote. In a reply the chair said, “We do our work to serve all Americans. We’re not serving any politician, any political figure, any cause, any issue, nothing. It’s just maximum employment and price stability on behalf of all Americans.” Fed's next policy meeting is November 6-7, immediately after the presidential election.
