The U.S. Federal Reserve slashed its key lending rate by half a percentage point on Wednesday, marking the first reduction in over four years. The rate cut, just weeks before the November presidential election, lowers borrowing costs on loans for businesses and consumers, including mortgages and credit cards.
This move signals the end of the Fed’s high-interest rate strategy, which had been aimed at curbing demand to control inflation. With inflation easing toward the Fed’s 2% target and the labor market cooling, the central bank is shifting its focus.
Wednesday’s significant rate cut could benefit Democratic candidate and Vice President Kamala Harris, who faces Republican rival and former president Donald Trump in the upcoming election. “While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” Harris said in a statement.
In contrast, Trump suggested the Fed’s decision was a response to a “very bad” economy or political maneuvering, calling the half-point cut “a big one.” Major U.S. stock indices fell following the announcement.
The Federal Open Market Committee (FOMC) voted 11-1 to lower the benchmark rate to between 4.75% and 5.00%, with additional cuts likely by the end of the year. Fed Chair Jerome Powell explained, “It is time to recalibrate our policy given the progress on inflation and employment.”
Analysts had expected a rate cut, though the size of the reduction surprised some. “I was a little surprised it was 50 basis points and not 25,” said former Boston Fed president Eric Rosengren, attributing the move to weaker-than-expected jobs data and positive inflation trends.
The Fed’s updated projections show an unemployment rate rising to 4.4% by the end of 2024, alongside an inflation rate of 2.3%. Futures traders now see a 65% chance of further rate cuts this year.
While the Fed operates independently under a congressional mandate to manage inflation and employment, its decisions are closely watched in the political arena. Trump has criticized Powell in the past, suggesting that the president should have a say in rate decisions. In response, Powell reaffirmed the Fed’s independence, stating, “We’re not serving any politician or political cause.”
With inflation and the cost of living at the forefront of voters’ minds, the Fed’s actions will undoubtedly play a role in shaping the economic landscape heading into November.
