The US is going big with the first interest rate cut in four years

The US central bank cut interest rates more than expected in its first reduction in more than four years, an important moment for the world’s largest economy.

The Federal Reserve said it would lower the target for its key lending rate by 0.5 percentage points, to a range of 4.75%-5%.

Officials made the move in response to rising prices and growing concern about the weakening labor market.

The lower rates will provide relief to borrowers in the United States, who have been struggling with interest rates hovering at the highest levels in more than two decades.

The widely expected cut is larger than many analysts had predicted just a week ago, and officials signaled that more cuts were likely to follow before the end of the year.

The Fed raised interest rates sharply in 2022, with the aim of cooling the economy and stabilizing prices, which are then rising at the fastest rate since the 1980s.

But officials have gained confidence that inflation, the rate at which prices rise, is now back towards its 2% target.

Meanwhile, officials have become more concerned about the labor market, with the unemployment rate rising to 4.2% from 3.7% at the beginning of the year.

Projections released after the meeting showed officials now see inflation falling faster and unemployment rising higher than they did a few months ago.

Unemployment is expected to reach 4.4% by the end of 2024.

Federal Reserve Chairman Jerome Powell admitted Wednesday’s cut was a “strong” move, but said it was intended to preserve progress rather than signal significant concerns about the economy.

“The labor market is in a strong place – we want to keep it there,” Mr Powell said. “That’s what we do.”

The Fed’s move follows cuts by other central banks, including those in Europe, the United Kingdom and ​Canada.

Before the meeting, there was unusual uncertainty about how much reduction officials would approve.

But economist Randall Kroszner, a professor at the University of Chicago’s Booth School of Business and a former Fed governor, said Wednesday’s announcement was significant not because of the size of the cut, but because it will start a new period of lower borrowing costs. .

“A quarter of a percentage point one way or another — it’s not going to break the U.S. economy,” he said. “That’s really where they’re headed both for the rest of the year, and also in the intermediate and longer term.”

The forecasts published by the Fed showed that officials expect their key lending rate to fall to around 4.4% at the end of the year and 3.4% at the end of 2025. It is significantly lower than those who have predicting until June.

Jennifer Heasley, the owner of Sweet Mama’s Mambo Sauce, has been waiting anxiously for the Fed to act, after using credit cards to help pay for the expansion of the barbecue-like sauce business two years ago.

“My interest rates have gone up, so my monthly payments have gone up tremendously,” he said, noting that one card now charges 21%.

“If you buy a piece of equipment for $1,500 and put that on a credit card — if you don’t pay that off, you’re racking up a lot of interest,” he said.

“To me, it’s a big deal for them to start going down.”

Additional reporting by Michelle Fleury