The Federal Reserve (Fed) aggressively slashed interest rates Wednesday, announcing the first rate cut since March 2020. The decision surprised some economists and policy experts.
The Fed's Decision to Cut Interest Rates
The Fed lowered its benchmark rate by 0.50 percentage points on Wednesday, or double the more typical 0.25 percentage point cut. This move marked a critical turning point in the Fed’s fight against the hottest inflation in 40 years. Market odds overwhelmingly supported a 25 basis point cut the week before the decision.
Market and Employment Reactions
One week before the meeting, markets saw a 70% chance of a 25 basis point rate cut. Also, 24 hours before the decision, the odds of a 25 basis point cut were as high as 72%. However, the general sentiment heading into September supported the CME’s Fed watch sentiments. According to a CNN report, there was no emergency demanding an aggressive rate cut in September or any part of this year. As predicted, the August jobs report showed that unemployment fell from 4.3% to 4.2%.
Jerome Powell's Statements
During the Fed meeting, Powell said that the economy was still technically at 'maximum unemployment.' This meant that the unemployment was below 5.0%. Whether the Fed was pressured into a larger cut or not remains a debate. Powell noted that the decision to cut by half a point is 'a sign of our commitment' to not fall behind in responding to the economy’s reality.
What remains clear is that it wasn’t a unanimous decision, and that should raise some red flags. Whether this will signify a stable economy ahead of the November elections remains to be seen.
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