Hanover Advisors Inc.
09/18/2024 | News release | Archived content
Fed Surprises With Half Percentage Point Rate Cut
Blog
Fed Surprises With Half Percentage Point Rate Cut
September 18, 2024
Federal Reserve policymakers voted to cut interest rates by a half-percentage point, opting for a more robust start in its first cut since 2020. The long-awaited pivot follows an aggressive two-year fight against inflation that saw the Fed raise rates to the highest level in more than 20 years.
Eleven of 12 members of the committee supported the cut, which drops the key fed funds rate to a range between 4.75% and 5%. Quarterly projections released after the committee meeting showed a narrow majority of Fed officials supporting another two rate cuts of at least a quarter-percentage point at meetings in November and December.
Heading into the meeting, the markets were split on whether we would see an aggressive half-percentage point cut or a more measured quarter-percentage point. Fed officials typically tend to prefer making smaller changes to avoid having to reverse course if their moves prove to be premature.
Some analysts have taken the aggressive size of the cut as an indication that the Fed is worried about economic growth, particularly the labor market, which has shown marked signs of cooling over the summer. The unemployment rate stood at 4.2% last month, up from 3.7% at the start of the year. Fed chairman Jerome Powell signaled in August that the Fed would be shifting attention to prevent the labor market cooling from descending into a deeper freeze.
The larger-than-expected cut indicates a clear pivot from the Fed: with the battle against inflation seemingly won, the Fed is now focusing its efforts on ensuring that the past rate cuts do not further weaken the economy.
The rate cut may provide some immediate relief to consumers with credit card balances or other variable-rate debt. Long-term borrowing costs, like mortgages, have already been declining in anticipation of rate cuts this fall and winter.
Interest-rate projections also showed that officials have penciled in the equivalent of another four quarter-percentage point cuts next year, assuming that inflation remains on its downward trend and unemployment does not jump. That would bring the fed funds rate to a range just below 3.5% by the end of 2025.