America’s central bank last night announced a jumbo half percentage point interest rate cut as it scrambles to deliver a ‘soft landing’ for the world’s biggest economy.
It was the first cut by the US Federal Reserve in four years and sent the dollar sliding against the pound, which hit a fresh two-and-a-half-year high of just below $1.33.
The Fed’s last cut came in 2020, when the US economy was in the grip of the pandemic. Since then, it has had to raise rates as it tackled soaring inflation.
‘In good shape’: Federal Reserve chief Jerome Powell (pictured) says the US economy is growing at a solid pace
Now, however, inflation is back down at 2.5 per cent, its lowest for three-and-a-half years, and the Fed has turned its attention to worries about a flagging jobs market.
That has raised fears that high rates could be pushing the world’s biggest economy into a downturn.
Fed chief Jerome Powell said: ‘This recalibration will help maintain the strength of the economy and the labour market, and will continue to enable further progress on inflation.
‘The US economy is in good shape. It is growing at a solid pace. We want to keep it there.’
Powell denied that the Fed was too late in cutting rates. ‘We don’t think we’re behind, we think this is timely,’ he said.
‘But I think you can take this as a sign of our commitment not to get behind – it’s a strong move.
‘We’re trying to achieve a situation where we restore price stability without the painful increase in unemployment that has come sometimes with disinflation.’
He said the jobs market had ‘cooled from its former overheated state’ and that the Fed was now projecting unemployment at 4.4 per cent by the end of the year, up from a current 4.2 per cent.
The Fed has also reduced its expectation of inflation.
And projections released by the central bank indicate that rates will fall by another half-percentage point by the end of this year, another full percentage point in 2025 and a final half-point in 2026.
Expectations of a cut intensified last month when Powell told a meeting of central bankers: ‘The time has come for policy to adjust.’
In recent days, market betting was increasingly pointing to the likelihood of a half percentage point move rather than the more traditional 0.25 percentage point.
Last night’s decision saw the Fed cut rates from a range of 5.25 per cent to 5.5 per cent to a range of 4.75 per cent to 5 per cent.
Its aim has been to try to bring inflation down to its 2 per cent target without having to push the economy into contraction – a so-called ‘soft landing’.
The Fed said it had ‘gained greater confidence that inflation is moving sustainably towards 2 per cent’.
Isaac Stell, investment manager at Wealth Club, a stockbroker, said: ‘The market was calling for it, and the Fed has delivered.
Many may be left wondering what the Fed sees on the horizon to prompt such a bold move.’
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