The Federal Reserve lowered its benchmark interest rate by a supersized 50 basis points, outpacing expectations of 25 basis points. Markets surged Wednesday afternoon, Sept. 18, as the central bank ended its rate-hike campaign that started in 2022.
The federal funds rate now sits between 4.75%-5%, down from 5.25%-5.5%. This marks the first rate cut in four years after inflation spiked amid the COVID-19 pandemic.
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“Recent indicators suggest that economic activity has continued to expand at a solid pace,” The Federal Open Markets Committee said in a statement. “Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2% objective but remains somewhat elevated.”
Inflation cooled for the fifth straight month in August at 2.5%, inching closer to the Federal Reserve’s target of 2%. But core prices, which strip out food and energy, stayed stagnant at 3.2%.
“In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement read. “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2% objective.”
The S&P 500, NASDAQ and Dow notched gains in immediate response to news of the rate cut.
The Federal Reserve has a dual mandate of full employment and price stability. To keep those numbers in line with a strong economy, they use tools like adjusting the federal funds rate, which is the overnight lending rate for banks but in a downstream way affects interest rates on everything from mortgages to car loans.
The FOMC will not meet in October. The next policy meeting will take place on Nov. 6-7, right after Election Day.
