In making its first interest rate cut in more than four years, the Federal Reserve went big — a decision that took some economists and policy experts by surprise, while also providing cheer to Wall Street and consumers eager for relief from high borrowing costs.
The Federal Reserve on Wednesday lowered its benchmark rate by 0.50 percentage points, or double the more typical 0.25 percentage point cut. The moment marks a critical turning point in the Fed’s fight against the hottest inflation in 40 years, which resulted in a flurry of rate hikes that pushed the bank’s federal funds rate to its highest in 23 years.
Behind the Fed’s decision to make a jumbo cut are its efforts to juggle its so-called “dual mandate” to maintain stable prices — in other words, to keep inflation low — and ensure full employment. But the cut also carries implications for the broader economy, as it will influence consumers’ and businesses’ decisions about everything from major purchases to saving.
“The messaging from the Fed is inflation has slowed, and because of that we don’t need rates at such high levels,” Veronica Clark, an economist at Citi, told CBS News. “That will impact affordability for things like new homes, new cars or credit cards, and so the consumer will eventually feel the impact of lower rates.”
Here are 5 takeaways about Wednesday’s jumbo cut.
A “soft landing” could be near
One concern among economists was whether the U.S. would be able to navigate a so-called “soft landing,” essentially sidestepping a recession despite headwinds created by the highest interest rates in 23 years.
At a Wednesday press conference, Federal Reserve Chair Jerome Powell stressed he isn’t seeing “anything in the economy right now that suggests that the likelihood of a downturn is elevated.” Instead, he painted the portrait of a solid economy that has so far skirted a recession.
“The U.S. economy is in a good place, and our decision today is designed to keep it there,” Powell said, when asked at a Wednesday press conference by CBS News’ Jo Ling Kent about the message the Fed was sending by making a large cut.
Economists and investment experts noted that the jumbo rate cut could help the U.S. dodge a downturn.
“The decision, combined with Powell’s messaging, bolsters our optimism in our base case call for a soft landing,” Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, wrote in an email.
The job market is slowing — but still solid
The Federal Reserve’s decision to cut this month was influenced by weaker data from the labor market, with a disappointing July jobs report followed by a Labor Department data revision that showed the U.S. added 818,000 fewer jobs in the 12 months ended March 2024 than originally reported.
To be sure, the job market is far from the supercharged hiring during the pandemic, when employers sought to add workers while also struggling with labor market shortages, which caused wages to spike. But Powell noted that the current unemployment rate of 4.2% is historically low, and that while hiring is moderating, the labor market remains fairly solid.
“Anything in the low fours is really a good labor market,” Powell said. “Participation is at high levels.”
But in cutting interest rates by 0.50 percentage points, the Fed wants to ensure the labor market doesn’t slow from here. “We believe, with an appropriate recalibration of our policy, that we can continue to see the economy growing and that will support the labor market,” Powell noted.
It’s not “mission accomplished” yet on inflation
Powell stressed that the decision to cut was made after seeing progress on the Fed’s goal to cool inflation toward its 2% annual target — but added that the central bank isn’t yet ready to declare victory.
“We’re not saying ‘mission accomplished’ or anything like that, but I have to say, though, we’re encouraged by the progress that we have made,” Powell said.
Even so, Powell expressed confidence that inflation will continue to decline, eventually reaching the central bank’s 2% goal. The Federal Open Market Committee (FOMC)’s members are predicting that Personal Consumption Expenditures (PCE), a measure of inflation tracked by the Fed, will hit 2.3% in 2024, and then fall to 2.1% in 2025.
Expect more rate cuts from the Fed
The Fed also forecast additional rate cuts this year and in 2025, setting the stage for more relief on borrowing costs for consumers and businesses.
The Fed’s economic projections show that FOMC members are pegging the median 2024 federal funds rate at 4.4%. That would represent a roughly 1 percentage point reduction from its prior level — in other words, the central bank is projecting another 0.50 percentage point reduction by year end.
But with two meetings left in 2025 — scheduled for November and December — it’s unclear whether the Fed will opt for another jumbo cut at one of those meetings, or cut by 0.25 percentage points at both, economists noted.
“We see the choice between a 25bp and 50bp cut in November as a close call,” Goldman Sachs economists wrote in a Wednesday research note. Powell “said that 50bp should not be assumed to be the new pace, but he emphasized that the FOMC will be ‘making decisions meeting by meeting based on the incoming data.'”
The federal funds rate is forecast to stand at 3.4% by the end of 2025, according to the FOMC’s projections.
The housing market could see some relief
Mortgage rates have already eased in anticipation of the Fed’s rate cut, and could continue to see reductions. But the Fed’s rate decisions are just part of the factors that influence home loan rates, which are also impacted by economic trends such as the labor market and housing demand.
Powell noted that the lower mortgage rates could help thaw the housing market, which has been frozen by the low rates many homeowners locked in during the pandemic, when people could refinance into 30-year fixed mortgages with rates of about 3% — less than half of today’s rates.
“As rates come down, people will start to move more, and that’s probably beginning to happen already,” Powell said.
But, he cautioned, the housing market is also impacted by issues beyond the Fed’s control, including a lack of housing supply. “It’s hard to zone lots that are in places where people want to live. And you know, where are we going to get the supply?” he noted. “And this is not something that the Fed can can really fix. But I think as we normalize rates, you’ll see the housing market normalized.”