The US Federal Reserve dramatically cut interest rates for the first time in more than four years on Wednesday night in an effort to support the world’s biggest economy.
The central bank reduced borrowing costs by 0.5 percentage points – a larger than average cut – in what was the first reduction in borrowing costs since the onset of Covid in March 2020.
The “dot plot” published by the central bank also indicated that interest rates could be cut by another half a percentage point before the end of the year. The Fed’s next decision will be announced on November 7, after the US election on November 5.
The decision came hours before the Bank of England’s latest rate-setting meeting on Thursday, at which policymakers are expected to hold rates steady after cutting interest rates for the first time in four years in August.
The Fed’s cut was accompanied by a warning that the outlook for the world’s largest economy was “uncertain”.
However, chairman Jerome Powell insisted that the large reduction was a sign that the fight against inflation was coming to an end and said the US economy was healthy, despite concerns it could be heading towards recession.
Mr Powell said: “Our patient approach over the past year has paid dividends. Inflation is now much closer to our objective, and we have gained greater confidence that inflation is moving sustainably toward 2pc.
“The labour market is in solid condition and our intention with our policy today is to keep it there. You can say that with the whole economy.”
However, the decision drew immediate criticism from some supporters of Donald Trump, who accused the Fed of trying to influence the US election.
The timing of the rate cut, less than two months before the election, is seen as beneficial to Kamala Harris, who is fighting an incumbent campaign.
The Vice President said the rate cut was “welcome news for Americans who have borne the brunt of high prices.”
Supporters of Donald Trump immediately seized upon the size of the Fed move to claim that it was a political move.
Senator Tommy Tuberville, of Alabama, said on X: “The Fed’s drastic rate cut is shamelessly political. Our nation’s central bank has no business moving rates this close to an election and is clearly trying to tip the balance in favor of Kamala Harris.”
Mr Trump earlier this year accused Mr Powell of being “political” and said he would cut interest rates to “help the Democrats”.
The Fed’s decision to begin cutting rates on Wednesday marked the closest the central bank has come to a US presidential election when launching an easing cycle in nearly half a century.
While interest rate policy is rarely static during election years, kicking off a brand new rate-cutting phase with fewer than 10 weeks to polling day has happened only twice before – in 1976 and in 1984.
Mr Powell insisted that Fed officials gave no consideration to the election in their decision.
He said: “This is my fourth presidential election at the Fed. It’s always the same. We’re always going into this meeting in particular and asking, ‘What’s the right thing to do for the people we serve?’ We do that and we make a decision as a group and we announce it. That’s always what it is. Nothing else is discussed.”
The decision to cut rates had been widely expected ahead of the meeting, amid slowing inflation and signs of a weakening economy.
Mr Trump told a town hall in Flint, Michigan, on Tuesday night earlier this week that a rate cut would suggest the “economy is now not good … Otherwise, you wouldn’t be able to do it.”
The former president has previously suggested he would take away the Fed’s independence if re-elected and set interest rates himself.
“I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman,” Mr Trump said in August.
The Fed’s move brings its target lending rate to a range of 4.75pc to 5pc, down from 5.25pc to 5.50pc.
The decision instantly boosted markets, with the S&P 500 up by as much as 0.6pc up and tech-heavy Nasdaq 0.8pc.
Mr Powell said recent data “indicates an economy that is still growing at a solid pace” despite a flurry of data suggested that the US labour market is cooling. The US economy added fewer jobs than expected both in July and August.
The remarks suggest that a so-called soft landing is still within reach, meaning inflation will have fallen without high interest rates triggering a recession.
Inflation in the US currently stands at 2.5pc, although fears still linger over price pressures in the housing market.
Figures earlier on Wednesday morning showed that UK inflation held steady last month at 2.2pc, according to the Office for National Statistics (ONS). This was unchanged from July despite a big jump in European airfares as parents took their children away for the school holidays. The headline rate was also in line with economists’ expectations.