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Fed Cuts Interest Rates by Half Point, Marking Aggressive Start to Easing Campaign

The Federal Reserve on Wednesday unveiled a significant 0.5% interest cut, which marked the first since the start of the COVID-19 pandemic, signaling the launch of its first easing cycle in four years. The Federal Open Market Committee (FOMC) set the federal funds rate between 4.75% and 5%, which they said was based on slowing labor market conditions and abating inflationary pressures. 

The cut reflects increasing worries over the softening of the labor market and inflation, which has cooled but remains over 2% above the Fed’s target. This is the largest cut by the Fed outside the pandemic era since the financial crisis of 2008. It came as markets expected to see a half-point cut at the end, rather than the dovish move, in the final days before the decision. 

Fed Chairman Jerome Powell said the institution is committed to controlling inflation without a sharp increase in unemployment. “We’re trying to restore price stability without painful increases in unemployment,” he said at a press conference. “Today’s action demonstrates our strong commitment to that goal.”. 

The FOMC’s “dot plot” also projected further cuts, meaning another 50 basis points by the end of the year and potentially lowering 2 percentage points by 2025. “We are trying to restore price stability without painful increases in unemployment,” he said at a press conference. “The action we take today reinforces our commitment to that goal.” The committee determined that “job gains have slowed, and the unemployment rate has moved up but remains low.” 

Perhaps the most significant vote, though, was that for a rate cut, which went 11-1, with Governor Michelle Bowman dissenting in a more moderate view of a 0.25% rate cut. It would be the first dissent from a Fed governor since 2005. 

While the U.S. economy continues to emerge unscathed, still with gross domestic product rising and consumer spending robust, the Fed’s attention turned to management of a labor market slowdown. Inflation remains above the target bank’s 2 percent but is dropping substantially from that peak level. 

The cut in interest rates, therefore, marks a recalibration of monetary policy at the Fed to pave for further cuts; however, the Federal Reserve Chair, Powell, noted that these were not part of a series of aggressive cuts. 

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