Vithanage Erandi Kawshalya Madhushani Jade Times Staff
V.E.K. Madhushani is a Jadetimes news reporter covering Business.
Fed Lowers Rates by 0.5% in Larger Than Expected Move to Support Economy
The US Federal Reserve has slashed interest rates for the first time in more than four years, cutting its key lending rate by 0.5 percentage points to a range of 4.75%-5%. Fed Chair Jerome Powell described the cut as a necessary step to address slowing price increases and growing concerns about the job market. The move offers relief to borrowers facing the highest interest rates in over two decades.
The decision was larger than analysts had predicted just a week prior, and the central bank signaled further reductions could come by the end of the year. The rate cut is part of the Fed's strategy to prevent high borrowing costs, initially implemented to combat inflation, from stifling economic growth.
Powell emphasized the importance of maintaining a strong labor market, stating, "The labor market is in a strong place we want to keep it there." The Fed’s move follows similar actions by other central banks in Europe, the UK, and Canada.
Economic Outlook and Impact of High Rates
The Fed had aggressively raised rates starting in 2022 to curb inflation, leading to higher borrowing costs for mortgages, car loans, and other debts. However, as inflation eased, officials shifted focus to broader economic risks, including rising unemployment. The US jobless rate has increased to 4.2% from 3.7% earlier this year.
Though Powell acknowledged that the labor market had been overheated in 2022, he welcomed signs of cooling and downplayed concerns about an imminent recession. Projections show that the unemployment rate may rise to 4.4% by the end of 2024.
Despite these concerns, the US economy remains resilient. The Commerce Department reported 3% annual growth in the second quarter, and consumer spending has stayed strong. Inflation has also dropped to 2.5%, moving closer to the Fed's 2% target for the fifth consecutive month.
Significance of the Cut and Future Projections
Historically, the Fed has reserved large rate cuts like this for times of crisis, such as during the 2008 financial crash or the onset of the COVID-19 pandemic. Economists like Randall Kroszner from the University of Chicago note that while the size of the cut is notable, the more significant aspect is that it signals the beginning of a period of lower borrowing costs.
Forecasts suggest that the Fed’s key rate will drop to 4.4% by the end of the year and 3.4% by 2025, lower than previous predictions. This reduction is expected to ease pressure on borrowers like small business owner Jennifer Heasley, who has faced rising costs on credit card debt for her barbecue sauce business.
While stock markets initially reacted positively to the announcement, with the Dow Jones, S&P 500, and Nasdaq all jumping, they ultimately closed the day with modest losses.
