Key Points

  • The Federal Reserve cut its benchmark interest rate by 50 basis points on Wednesday to a range of 4.75%-5%,citing progress on cooling inflation, which has moved closer to its 2% target from over 9% two years ago.
  • Fed Chair Jerome Powell said at a press conference: "This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, the strength of the labor market can be maintained while the economy grows at a moderate pace and inflation moves sustainably down to 2%."Powell said at the press conference. According to the median of projections released by officials on Wednesday, they expect the federal funds rate to fall to 4.4% by December and 3.4% by the end of next year.
  • Fed officials project that the core personal consumption expenditures (PCE) price index, which excludes food and energy, will end 2024 at 2.6%, unchanged from July, and fall to 2.2% by the end of next year,according to their median projections. Officials expect the unemployment rate to rise from 4.2% in August to 4.4% by December 2024.

Deeper Dive

Of the Fed's 12 policymakers, 11 supported the 50-basis-point cut, with Governor Michelle Bowman dissenting in favor of a 25-basis-point reduction.

However, Powell said Bowman, along with the other 18 Fed officials who participated in the two-day policy meeting, supported multiple rate cuts this year, as seen in the projections released Wednesday.

"Seventeen of 19 people expect at least three cuts, and 10 of 19 expect at least four cuts," Powell said. "There are dissents, and there are differences of views, but there is also a lot of consensus."

Weeks earlier, Fed policymakers had signaled they would lower borrowing costs, noting that after more than two years focused on ensuring price stability, a cooling job market prompted them to shift more attention to their other congressional mandate: promoting maximum employment.

"The upside risks to inflation have diminished, and the downside risks to employment have increased," Powell said. "We now see the risks to achieving our employment and inflation goals as roughly in balance."

Wage growth has slowed this year, whilethe unemployment rate rose to 4.2% last month, up from 3.7% in December, as more workers entered the labor force and companies tightened their hiring plans.

Before the Fed's easing, economists and Wall Street analysts were divided over whether policymakers would choose a 50-basis-point cut to prevent an economic downturn and widespread job losses, or a 25-basis-point cut to minimize the chance of a rebound in price pressures.

"We know that reducing policy restraint too quickly could hinder progress on inflation," Powell said Wednesday. "At the same time, reducing restraint too slowly could unduly weaken economic activity and employment."

Before moving away from the most aggressive tightening in four decades, Fed policymakers needed to interpret mixed signals in the economy.

Despite the cooling job market, Commerce Department data released Tuesday showed retail sales unexpectedly rose 0.1% last month.

The Commerce Department said sales fell in most of the 13 categories covered by the report, including clothing, gasoline, furniture, and electronics. However, e-commerce sales rose 1.4%, and sales of personal care items as well as building materials and garden supplies also increased.

More broadly, economic growth this year has exceeded the expectations of Fed officials and many private-sector economists.

The Atlanta Fed said Wednesday thatgross domestic product (GDP) in the third quarter is likely expanding at a 2.9% annualized rate. According to the Bureau of Economic Analysis, the economy grew at an annualized rate of 1.4% in the first quarter,and 3% in the second quarter。

Fed officials in their median projections expect GDP growth of 2% this year, down from the 2.1% forecast in June. They expect the economy to grow 2% in both next year and 2026, unchanged from June projections.

"The U.S. economy is in a good place, and our decision today is designed to keep it there," Powell said, adding that "the labor market remains in solid condition."

"I don't see anything in the economy right now that suggests the likelihood of a recession—sorry, a downturn—is elevated," he said. "What you see is solid growth, inflation coming down, and a labor market that is still at solid levels."

According to the median projections, central bank officials expect the federal funds rate to fall to 4.4% by the end of this year, 3.4% in 2025, 2.9% in 2026, with a long-run neutral rate of 2.9%.

Powell said the U.S. may not return to the near-zero interest rate era seen before the pandemic. "My feeling is we won't get back to that level, but honestly, we'll have to see."

Fed officials expect continued progress in the fight against inflation, with core PCE falling to 2.6% this year, 2.2% next year, and reaching the 2% target in 2026, according to median projections.

Commenting on the Fed's anti-inflation efforts, Powell said: "We're not saying the mission is accomplished or anything like that, but I have to say, we are encouraged by the progress we have made."