Fed cuts interest rate in historic move. Are more large cuts ahead?

WASHINGTON — In the end, the Fed decided to go big.

The Federal Reserve lowered its key interest rate by a hefty half percentage point Wednesday, moving ahead with its first rate cut in four years and cheering markets that expected an emphatic move amid a softening jobs picture.

With the slowing labor market posing a growing risk to the economic expansion, Fed officials opted for a bold approach to launch a projected flurry of rate cuts now that inflation is easing.

But the central bank forecast a total of just a half point in additional cuts the rest of the year, signaling officials don’t believe the job market is collapsing.

“The (Fed) 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,” the Fed said in a statement after a two-day meeting. “The economic outlook is uncertain, and the Fed is attentive to the risks of both sides of its dual mandate.”

Fed officials also said “inflation has made further progress toward (their) 2% goal.” Previously, they said “there has been some further progress” toward that target.

Fed Governor Michelle Bowman was the lone dissenter, preferring a quarter point cut.

What is the current Fed interest rate?

The Fed’s historic decision lowers its benchmark short-term rate to a range of 4.75% to 5% from a 23-year high of 5.25% to 5.5%. The move is expected to ripple through the economy, providing the first dose of relief in years to Americans who have struggled with high borrowing costs for mortgages, credit cards, and auto and other loans.

Yet it also will trim bank savings account yields that finally have provided significant returns.

Are interest rates expected to go down in 2024?

Besides forecasting a dip in the federal funds rate to a range of 4.75% to 5% by year’s end, Fed policymakers penciled in the equivalent of four more quarter-point cuts next year and another two in 2026, according to their median estimate. That roadmap that would reduce the key rate to about 2.9% by the end of 2026.

Yet officials were divided, with nine looking for a smaller drop in rates by December, nine seeking a percentage point drop and one projecting a steeper drop.

Before the decision, futures markets correctly predicted the Fed would approve a half-point cut Wednesday. But they forecast a total 1.25 percentage points in reductions this year and officials’ median estimate fell a quarter point shy of that.

The economy has been sturdy, growing at a 3% annual rate in the second quarter, giving the Fed another reason to whittle down rates at a measured pace. But the central bank Wednesday slightly downgraded its economic growth forecast for 2024.And it raised its estimate of the year-end unemployment rate while lowering its inflation projection.

In recent months, Fed policymakers have said they were drawing closer to reducing the fed funds rate now that risks to their mandates of stable prices and maximum employment have become more balanced. Some forecasters have said the rate already should be at a “neutral” level of less than 4% - which theoretically would neither spur nor slow the economy - and the Fed was behind the curve.

The Fed lifts rates to curb borrowing and economic activity to bring down inflation. It lowers rates to stimulate the economy and stave off, or propel the nation from, recession.

Is inflation really going down?

In 2022 and 2023, the Fed hiked its key rate from near zero to subdue a pandemic-induced inflation spike. Annual inflation has fallen from a 40-year high of nearly 6% in mid-2022 to under 3% as COVID-19-related product and labor shortages have faded, according to the Fed’s preferred measure. But prices surged unexpectedly early this year, leading officials to put off long-awaited rate decreases.

Since April, however, inflation has steadily drifted lower, boosting officials’ confidence that it’s headed sustainably to the Fed’s 2% goal. In July, a different inflation measure, the consumer price index, eased broadly but a core reading that excludes volatile food and energy items accelerated.

Some forecasters said that likely solidified this week’s more modest quarter point rate cut. The Fed’s preferred inflation measure, though, has been tamer. Barclays estimates a report later this month will show it fell from to 2.2% in August from 2.5% the previous month while the core measure ticked up to 2.7% as goods prices fell while the cost of services such as rent and health care marched higher.

Is the job market weakening?

Meanwhile, a job market that was sizzling as recently as last year has been wobbling. Catch-up hiring following the health crisis has largely run its course, pandemic-related labor shortages have eased and many businesses have curtailed hiring and investment because of high borrowing costs.

From June through August, average monthly job gains slowed to 116,000 from 211,000 the previous three months. And the unemployment rate rose from 3.7% in January to a still-low 4.2% last month. Job openings have tumbled to the lowest level since January 2021 and hiring has slid below prepandemic levels.

Some economists have downplayed the rising unemployment rate. Noting that layoffs have remained low, they say it has been driven by a surge of immigrants into the labor force who haven’t yet found jobs.

How high will inflation be in 2024?

Fed officials estimated Wednesday their preferred measure of annual inflation, the personal consumption expenditures (PCE) index, will fall from 2.5% to 2.3% by December, below the 2.6% they predicted in July.

A core PCE inflation reading the Fed watches more closely is expected to hold stay at 2.6% by the end of the year, below the prior 2.8% estimate. It’s projected to drop to 2.2Q% by the end of next year.

Will the job market get better?

The 4.2% unemployment rate is projected to end 2024 at 4.4%, above the July forecast of 4%, the Fed’s median estimate shows. The rate is expected to close out 2025 at 4.4%.

How is the US economy doing right now?

The Fed said it expects the economy to grow 2% this year, below its prior 2.1% estimate. It also predicts 2% growth in 2025.

Consumer spending, which makes up 70% of economic activity, has been surprisingly resilient despite high interest rates and inflation. But low- and middle-income households are feeling the effects as they cope with record credit card debt and high delinquency rates. They have largely depleted their pandemic savings.

Want to learn more? USA TODAY explains the news on interest rates. For more answers to your questions about today's report and other economic trends, keep reading:

What is the current Fed benchmark interest rate?

The short-term, benchmark federal funds rate stands at a 23-year high, expressed as a range from 5.25% to 5.5%.

From March 2022 to July 2023, the Fed hiked its key rate from near zero to a 23-year high of 5.25% to 5.5% to tame the largest inflation spike in 40 years. It has stood pat the past year as consumer price increases have moderated.

- Medora Lee

Has the U.S. achieved a 'soft landing'?

In a speech last month, Fed Chair Jerome Powell explained why he believes federal regulators may have achieved a “soft landing,” meaning the Fed manages to tamp down the nation's inflation crisis without setting off a recession.

The pandemic set off the inflation spike as workers in factories, ports and warehouses were idled by COVID-19. At the same time, Americans hunkered down at home and, flush with stimulus checks, bought massive amounts of furniture, computers and other goods. Inflation, Powell said, was amplified by Russia’s invasion of Ukraine, which drove up the price of energy and other commodities.

But eventually, those pandemic-induced distortions waned as the health crisis improved. Widespread labor shortages eased. And there were so many job openings – a record 12 million in March 2022 – that the labor market was able to rebalance itself.

The Fed, Powell said, played a key role. Its rate hikes succeeded in keeping inflation expectations “anchored,” or stable, despite the sharp rise in prices.

- Paul Davidson

How is the US economy doing?

The broader economy has been humming along at a pace that has allowed the Fed to keep interest rates elevated. The U.S. economy produced $22.9 trillion of goods on an inflation-adjusted, annualized basis in the second quarter, according to the Bureau of Labor Statistics. That pushed up gross domestic product by 3% from the first quarter .

The U.S. economy grew unexpectedly fast in the second quarter, after a tepid first quarter. Some speculated after the first-quarter reading that high interest rates were starting to weigh on businesses and consumers.

The Zeta Economic Index , a monthly reading based on data collected from 240 million consumers, showed last week that the economy's upward trend continued in August, rising 0.6% from July to 67.4 on a 100-point scale.

The Zeta index is derived from several key indicators, and most are still on the rise. The clear outlier, though, is job market sentiment. It's down 1% from July and nearly 5% from last year. It's the same blinking yellow light the Fed sees now.

- Jim Sergent

What are some arguments for a quarter-point rate cut?

Some economists expect a half-point interest rate cut from the Fed today. Others anticipate only a quarter-point reduction. As of midday Wednesday, forecasters are almost evenly split , with the half-point scenario holding a slight edge.

Bill Nelson, chief economist at Bank Policy Institute, predicts a quarter-point cut, because August's so-called core inflation rate "surprised on the upside, most likely taking a 50-basis-point cut," or half a point, "off the table." The core inflation rate excludes the volatile food and energy sectors.

Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, also expects a quarter-point cut, pointing to the strike at Boeing as instructive. "The rejection of a 25% pay (over 4 years) increase is a headline that is hard to miss and shows inflation expectations are top of mind and likely to remain at a higher level," he wrote in a note.

- Charisse Jones

Why would a half-point rate cut make sense?

Some forecasters expect the Fed to cut interest rates by a quarter-point Wednesday. Most, however, expect a half-point reduction. The CME FedWatch forecast tracker favored a half-point cut by a 55-45 margin at midday. (Earlier Wednesday, forecasters rated the probability of a half-point reduction even higher.)

Michael Feroli, chief U.S. economist at J. P. Morgan, leans toward a half-point cut because "downside employment risks are growing, and upside inflation risks are ebbing." But "we don’t have full confidence that the (Fed) committee agrees just yet," he said.

At a conference in Singapore on Friday, former New York Fed President Bill Dudley said , "I think there's a strong case" for a half-point cut. Dudley thought the Fed should have lowered rates at its last meeting in July, "so the question is: 'Why don't you just get started?'"

- Charisse Jones , Daniel de Visé

Is the Fed rate too high?

After sharp rate hikes in 2022 and 2023 to fight inflation, the Fed’s benchmark interest rate remains at a 23-year high of 5.25% to 5.5%. Many forecasters believe that rate is too high.

Fed Chair Jerome Powell has described the risks to its mandates of stable prices and maximum employment as balanced. In that scenario, the benchmark federal funds rate ideally should be at a “neutral” level, believed to be just under 4%, said Nationwide Chief Economist Kathy Bostjancic. That’s a rate that would neither stimulate nor slow the economy. And it is well below the current federal funds rate.

“I think (the drop-off in the job market) is not consistent with the policy rate being so restrictive,” Bostjancic said.

If the Fed were to lower rates by a quarter-point Wednesday and at each subsequent meeting, “it takes almost a year” to arrive at the neutral rate, said economist Michael Feroli of JPMorgan Chase, in a note to clients. That timeline argues for “front-loading” rate cuts, he said.

Many forecasters expect the Fed to make a more aggressive half-point cut on Wednesday.

- Paul Davidson

What will be the Fed's focus at today's meeting?

With annual inflation easing to a more than three-year low in August , rising prices are now less of a concern for the Fed. Instead, the panel has turned its focus to the other half of is dual mandate: maximum employment.

Fed Chair Jerome Powell offered these words in an August speech in Jackson Hole, Wyoming : “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. We will do everything we can to support a strong labor market as we make further progress toward price stability.”

Since that speech, the labor market has continued to show signs of cooling. August saw a smaller-than-expected payrolls gain and sharp downward revisions to employment figures for the previous two months. The report cemented forecasts the Fed would cut rates Wednesday to keep the job market buoyant, but the size of the cut remains a mystery.

- Medora Lee

When is the last time the Fed cut rates?

It seems a lifetime ago, but the last time the Federal Reserve cut interest rates was in March 2020, at the dawn of the COVID-19 pandemic.

The Fed unleashed much of its arsenal that month to combat the economic damage wrought by the coronavirus, cutting short-term interest rates to zero, pumping cash into the financial system and encouraging more bank loans to households and businesses.

The moves, cheered by then-President Donald Trump , were aimed at combating a recession, which forecasters considered likely.

That month, central bank policymakers agreed to lower the Fed’s benchmark federal funds rate by a full percentage point, to a range of zero to 0.25%. And that would be the last pandemic-era rate cut.

- Daniel de Visé, Paul Davidson

How is the stock market reacting to the Fed meeting?

The stock market offered mixed signals as trading opened Wednesday, with stocks already buoyed on hopes that the Federal Reserve will deliver its first interest rate cut in four years.

Shortly after markets opened, the Dow Jones Industrial Average was down 0.2%, while the Nasdaq Composite was up 0.2%. The S&P 500 was essentially flat.

The Fed is almost universally expected to cut rates Wednesday, but traders are divided on how big the cut will be. Roughly two-thirds of forecasters expect a half-point rate cut, while roughly one-third foresee a more modest quarter-point cut. That level of uncertainty is unusual: the Fed typically signals its intentions clearly in advance of high-stakes meetings.

Stock indexes have been trading at or near record highs recently, partly in expectation of a rate cut from the Fed.

- Daniel de Visé

Why would the Fed decrease interest rates?

The central bank reduces interest rates to trim consumer and business borrowing costs , jolting a weak economy or propelling it from recession . It raises rates, or keeps them higher for longer, to dampen growth and bring down inflation. Historic inflation drove the campaign of rate increases in 2022 and 2023, leaving the Fed's benchmark rate perched at a 23-year high.

Nearly every forecaster expects the Fed to cut rates Wednesday, but economists are split on how large the cut might be: one-quarter point, or half a point. With most Fed moves well telegraphed ahead of meetings, that point of uncertainty provides some rare drama.

“It is a coin toss,” said Nationwide Chief Economist Kathy Bostjancic.

- Paul Davidson

How does the Fed interest rate work?

Interest rates don’t magically reset when the Federal Reserve raises or lowers its benchmark federal funds rate.

What, then, should consumers expect in the hours and days after an interest rate cut?

When the Fed lowers rates, it reduces the interest commercial banks pay when they borrow and lend excess reserves to each other overnight, according to Investopedia .

A Fed rate cut doesn’t immediately transform interest rates across the economy. Some types of interest rates take time to adjust. Others, including mortgage rates, have already been falling in anticipation of the Fed cutting rates this week. But many categories of loans react more or less instantaneously, experts say.

“It normally happens the next day,” Nathan Rogge, CEO of First Pacific Bank, told Marketplace . “So, if it was a Wednesday, by Thursday, you would have a different interest rate.”

- Daniel de Visé

What will happen with the stock market?

The stock market has already been rising in anticipation of lower interest rates. Lower rates usually boost stocks, because they allow companies to borrow at a lower cost to invest in and grow their businesses.

The broad Standard & Poor’s 500 index scored its best week of the year last week, and the blue-chip Dow touched a record high during Monday’s trading.

In the most recent rally, investors have expanded their buying beyond the so-called Magnificent Seven stocks of Apple, Amazon, Alphabet, Meta, Tesla, Microsoft and Nvidia. They’re snatching up high-quality dividend utilities, health care, real estate and consumer staples stocks, said Daniel Milan, managing partner at advisory firm Cornerstone Financial Services.

“This expanded breadth from early July is good, healthy for the market,” he said.

- Medora Lee

How high is inflation?

Inflation, a sustained increase in prices throughout the economy, has been well above the 10-year median of 2.1% for more than three years. The Fed policymakers say they prefer a low and stable inflation rate , so they can "make sound decisions regarding saving, borrowing and investment."

Inflation has fallen significantly in the past two years but remains elevated – largely because of housing costs. In August, the annual inflation rate as measured by the consumer price index fell to 2.5%, from 2.9% in July. The reading was the lowest since March 2021, a year before the Fed started pushing up interest rates.

- Jim Sergent

What can borrowers expect?

If the Fed cuts interest rates today, borrowers will likely see interest rates ease off their peaks on things like credit cards and auto loans, but they shouldn't expect any great immediate relief, analysts said.

September's average rate for new credit cards was 24.92%, unchanged from August and the highest since 2019, when LendingTree began tracking the data.

"While they’ll almost certainly fall from record highs in coming months, no one should expect dramatically reduced credit card bills anytime soon," said Matt Schulz, LendingTree credit analyst. "Barring the Fed unexpectedly stomping on the gas pedal when it comes to lowering rates, credit card APRs are still going to be high for the foreseeable future."

The same goes for rates on auto loans and other types of debt, he said.

- Medora Lee

How much will the Fed lower rates on Wednesday?

Will the Fed cut interest rates by half a point, or only a quarter point? Forecasters slightly favor a half-point cut, according to the CME's FedWatch tool , which gauges what sort of interest rate move the market is predicting. As of Wednesday morning, the site showed a 37% probability for a quarter-point cut and a 63% chance of a half-point decline.

- Charisse Jones

When is the next Fed meeting in 2024?

After today’s meeting, the Federal Reserve has two more opportunities to consider interest rate moves in 2024.

The remaining Fed meetings planned for 2024 are scheduled for Nov. 6-7 and Dec. 17-18.

- Medora Lee

This article originally appeared on USA TODAY: Fed cuts interest rate in historic move. Are more large cuts ahead?