The Federal Reserve cut interest rates by 50 basis points, lowering the target range for the federal funds rate to 4.75% to 5%, in a move that was widely expected by the market. Despite speculation about a smaller 25-basis-point reduction, the Fed opted for a larger cut, which had already been factored into bond yields. The 10-year Treasury yield climbed eight basis points to close at 3.72% following the announcement, signaling that investors had anticipated the move.
The Decision: In its statement, the Federal Open Market Committee (FOMC) cited progress on inflation and a balanced risk outlook as key factors behind the decision. “In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point,” the statement read.
- However, The committee indicated that future rate decisions would depend on economic data and evolving risks. “Additional adjustments to the target range for the federal funds rate…will carefully assess incoming data, the evolving outlook, and the balance of risks,” the FOMC wrote.
Labor Market: In a press conference following the rate cut, Federal Reserve Chairman Jerome Powell emphasized the health of the labor market and the broader economy. He noted that the labor market had cooled from its previously overheated state, but stressed that the Fed is not aiming for further weakening. “The labor market is in solid condition. And our intention with our policy move today is to keep it there,” Powell said.
- Powell also struck a confident tone about the broader U.S. economy. “The U.S. economy is in good shape. It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there,” he noted.
- REMINDER: In August, Powell speaking at Jackson Hole noted, “Today, the labor market has cooled considerably from its formerly overheated state…We do not seek or welcome further cooling in labor market conditions.”
Market Reaction: Despite the larger cut, financial markets largely shrugged off the news, with bond yields rising modestly as the rate reduction had already been priced in. The 10-year Treasury yield climbed eight basis points to close at 3.72% following the announcement.
Looking Ahead: The Fed projected that the federal funds rate would drop to 4.4% by the end of 2024, suggesting at least one more 50-basis-point cut or two smaller 25-basis-point reductions in the future. However, the pace and timing of any additional rate cuts remain uncertain, and will depend on economic conditions and inflation trends.
The decision marks a bold but cautious step by the Fed as it balances supporting economic growth while ensuring inflation remains on a downward path. Whether this marks the beginning of a more prolonged rate-cutting cycle or a temporary adjustment remains to be seen.
