Federal Reserve Cuts Interest Rates by Half Percentage Point

(Reuters) – The Federal Reserve cut interest rates by half of a percentage point on Wednesday, marking the beginning of what is expected to be a consistent easing of monetary policy. This significant reduction in borrowing costs follows increasing concern about the job market’s health.

Summary of Economic Projections

The Fed’s updated Summary of Economic Projections indicates that policymakers foresee the Fed’s benchmark rate, currently at 4.75%-5.0%, dropping by another half a percentage point by year-end, decreasing by a full percentage point in 2025, and concluding with a final half percentage cut in 2026, targeting a range of 2.75%-3.00%.

In a press conference following the meeting, Fed Chairman Jerome Powell stated that the projected path of interest rate reductions does not suggest an urgent process and expressed confidence that the Fed had not taken too long to initiate the easing.

Market Reactions

• STOCKS: The S&P 500 rose by 0.1%, bouncing between gains and losses.
• BONDS: Yield on benchmark U.S. 10-year notes slightly increased to 3.694%, while the 2-year note yield dropped to 3.611%.
• FOREX: The dollar index decreased by 0.2%, with the euro witnessing a similar rise.

Analysts’ Comments

Brad Bechtel, Global Head of FX, Jefferies, New York: “The market was evenly split ahead of the decision, indicating that half were surprised. The Fed aims to get ahead of a potential U.S. economic slowdown but market reactions so far have been moderate.”

Matthew Rowe, Head of Portfolio Management, Nomura Capital Management, New York: “The market’s initial reaction was positive but later turned cautiously optimistic, as participants debate whether the aggressive move is justified. Future profit-taking may ensue among investors.”

Tom Hainlin, Senior Investment Strategist, U.S. Bank, Minneapolis: “Market expectations varied going into the meeting. Powell’s focus on employment due to inflation nearing the target indicates potential risks to the labor market, which suggests further cuts are likely by year-end.”

Steve Sosnick, Chief Market Strategist, Interactive Brokers: “The necessity of a 50 basis point cut is questionable, yet it seems to be the message the Fed intended to send. Market concern about rate cuts appears to persist.”

Adam Button, Chief Currency Analyst, Forexlive, Toronto: “Powell’s dovish stance underscores a preemptive approach to rate-cutting. The market anticipates the Fed will operate similarly to other G10 banks, suggesting potential weakness in the U.S. dollar.”

Peter Cardillo, Chief Market Economist, Spartan Capital Securities, New York: “I anticipated a more gradual 25 basis point cut, making this decision considerably more generous. The fear of a weakening labor market likely influenced this aggressive action.”

Michele Raneri, Head of U.S. Research and Consulting, TransUnion, Chicago: “This interest rate reduction may lead to lower consumer payment obligations. While credit lending habits have shifted, it remains uncertain if this will encourage broader credit access.**

Conclusion

Overall, the Fed’s decision reflects a proactive strategy aimed at sustaining the labor market while gradually steering inflation back on course. The anticipated reactions in various markets indicate mixed sentiments as stakeholders analyze the implications of the rate cuts.