The Federal Reserve lowered its benchmark interest rate by half a percentage point on Wednesday, marking a significant shift in monetary policy as inflation continues to moderate. The central bank reduced the federal funds rate to a target range of 4.75% to 5%, the first rate cut since the pandemic began in 2020.
In its policy statement, the Fed noted that economic activity remains solid and job gains have slowed, while unemployment has ticked up but remains low overall. The committee expressed increased confidence that inflation is moving sustainably toward its 2% target, though it remains somewhat elevated.
“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the statement said.
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The decision to cut rates reflects the Fed’s view that the risks to its dual mandate of maximum employment and price stability have become more balanced. However, the central bank emphasized that the economic outlook remains uncertain and it will continue to closely monitor incoming data.
Fed Chair Jerome Powell stressed in his press conference that the committee will carefully assess further rate adjustments based on evolving economic conditions. The central bank also reiterated its commitment to reducing its balance sheet holdings of Treasury and mortgage-backed securities.
The rate cut was approved by a 11-1 vote, with Fed Governor Michelle Bowman dissenting in favor of a smaller quarter-point reduction. Markets reacted positively to the policy shift, with stocks rising and bond yields falling after the announcement.
Economists expect the Fed to continue gradually lowering rates this year if inflation remains on a downward trajectory. However, Powell emphasized that policy remains data-dependent and the Fed stands ready to adjust course if needed to support its goals.
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