As widely expected, the Federal Reserve finally made the big move on Wednesday, cutting its anchor interest rate by 50 basis points.
The cut brings the federal funds rate down to a 4.75% to 5.00% target range, pulling it lower for the first time since the Fed’s hawkish anti-inflation policy of interest rate hikes was adopted more than two years ago. Prior to the cut, the Fed had held the rate steady for 14 months. And not counting the emergency interest rate cuts instituted during the COVID-19 pandemic, the last time the Fed enacted at least a half-point rate reduction was in 2008, when the Fed sliced rates by 75 basis points.
It’s a bold pivot from even just a week ago, when many, extrapolating from recent employment and CPI data, expected a 25-bps reduction. The central bank, along with Fed Chairman Jerome Powell, had been telegraphing a rate reduction for weeks, with Powell hinting at the end of July that it had achieved some confidence to begin a rate-lowering cycle and noting last month that “the time has come for policy to adjust.” But notably, Powell also professed in July that a 50-bps decrease was “not something we’re thinking about right now.”
The statement released after the close of Wednesday’s policy-setting Federal Open Market Committee (FOMC) reflected some of the Fed’s motivations for the big swing, including, notably, that “the Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance.” That’s a contrast to the previous post-meeting statement, which noted that the risks toward the Fed’s dual mandate “continue to move into better balance.”
The vote for the 50-bps cut was nearly unanimous, with 11 of 12 committee members voting for the larger cut (one — Michelle W. Bowman — opted to vote for a 25-bps decrease). And more appear to be on the horizon; the Summary of Economic Projections (SEP), abridging FOMC meeting participants’ forward-looking views on monetary policy, projects a federal funds rate range of 4.25% to 4.5% by the end of 2024. That new estimate, which is lower than the SEP forecast released in June, implies another 50 basis points of cuts this year with two FOMC meetings left to go. Moreover, the median anchor rate projected within the most recent SEP by the end of 2025 is 3.4%, implying four 25-bps rate cuts next year.
That assertive stance is due to sit well with Fed watchers within the housing industry, many of whom have been clamoring for a rate cut for months to give the ailing sector a boost. With some viewing the labor market on shaky ground, there have been rumblings that the big opening gambit from the Fed may represent either a course-corrective move after too much inaction or a tacit recognition that the economy may be in for turbulence ahead.
“For the first time since the current class of college seniors left high school, the Federal Reserve has finally reduced interest rates,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green. “It was a pleasant surprise that the Fed decided on a half-point reduction at this meeting rather than the more typical quarter-point move. One might consider this bolder move to be a recognition that the Fed is behind the curve in reducing rates. So, instead of the Fed saying rates have been higher for long enough, they are saying rates have been higher for perhaps a bit too long.
“But the bolder initial move, along with the indication that an additional half point of cuts are projected this year and a full point of cuts projected in 2025, is some signal that the Fed sees potential storm clouds on the horizon for the economy, notwithstanding the Fed’s current view that the economy is on solid ground.”
For his part, Powell said that he views the half-point cut as indicative of the Fed’s belief in the prudence of its policy thus far.
“We come into this with a policy position that was put in place … in July of 2023, which was a time of high inflation and very low unemployment,” Powell said. “We’ve been very patient about reducing the policy rate. We’ve waited while other central banks around the world have cut, many of them, several times. We’ve waited, and I think that patience has really paid dividends in the form of our confidence that inflation is moving sustainably down to 2%. I think that’s what’s enabled us to take this strong move today.”
Powell suggested that now was, in the committee’s view, the right time to act.
“To me, the logic of this from both an economic standpoint and also a risk management standpoint was clear,” he said.
He was also quick to note that the larger rate trimming this time around doesn’t foreshadow how aggressive further moves are going to be, even if the SEP suggests a bevy of moves on the way.
“I do not think that anyone should look at this and think, ‘Oh, this is the new pace,’ he said. “We have to think about it in terms of the base case. Of course, what happens will happen. In the base case, what you see is, look at the SEP. You see cuts moving along. The sense of this is we’ll recalibrate our policy down over time to a more neutral level, and we’re moving at the pace that we think is appropriate given developments in the economy and the base case. The economy can move in a way that would cause us to move faster or slower, but [what we have projected today] is what the base case says.”
The mortgage industry was abuzz with reaction to the big cut. Here’s what the mortgage industry had to say.
