US Federal Reserve makes large rate cut citing 'greater confidence' on inflation

Federal Reserve board chairman Jerome Powell. Even though inflation 'remains somewhat elevated', the Fed statement said policymakers chose to cut the overnight rate 'in light of the progress on inflation and the balance of risks'. Picture: Susan Walsh/AP

The US Federal Reserve cut interest rates by half a percentage point yesterday, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs that followed growing unease about the health of the job market.

“The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the US central bank’s rate-setting committee said in their latest statement, which drew a dissent from governor Michelle Bowman who favoured only a quarter-percentage-point cut.

Policymakers see the Fed’s benchmark rate falling by another half a percentage point by the end of this year, another full percentage point in 2025, and by a final half of a percentage point in 2026, to end in a 2.75% - 3% range.

The endpoint reflects a slight upgrade, from 2.8% to 2.9%, in the longer-run federal funds rate, considered a “neutral” stance that neither encourages nor discourages economic activity.

Even though inflation “remains somewhat elevated”, the Fed statement said policymakers chose to cut the overnight rate to the 4.75%-5% range “in light of the progress on inflation and the balance of risks”.

The Fed would “adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals”, with attention to “both sides of its dual mandate” for stable prices and maximum employment.

• Reuters