Fed Takes Aggressive Rate Cut Approach: Now What?

The Federal Reserve cut interest rates by 0.50% today as it continues to aim for a soft-landing scenario. The interest rate cut is the first in the Fed’s historic fight against inflation that’s lasted over two years.

The vote for the half-point cut was almost a unanimous one, with 11 of the 12 Fed officials voting to bring rates down to the 4.75%-5% range. Federal governor Michelle Bowman voted instead for a 0.25% raise, the first dissent in interest rate voting since 2005, reported the WSJ. The more aggressive 0.50% rate cut over the predicted 0.25% cut by markets reflects the pivot in focus from inflation to economic health. It’s a significant departure from the last two years of Fed policy and is the first rate cut since 2020.

Path of interest rates from 2000 to current

Image source: WSJ

The Inflation Road Begins Downhill Coast

As inflation skyrocketed in 2022, the Fed expressed a determination to reign in inflation at all costs. This included a willingness to drive the economy into recession as long as inflation could be curbed to the desired 2% from its 9.1% peak in June 2022. Now, with inflation continuing to move closer to the desired 2% rate, the Fed turns its attention to preventing recession.

“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation,” Powell said in a meeting this afternoon, reported CNBC.