The U.S. Federal Reserve announced a cut in interest rates on Wednesday, reducing its benchmark federal funds rate by 50 basis points to a range of 4.75% to 5%. This marks the first reduction in four years as the central bank steps back from its aggressive efforts to tame inflation that surged to a two-decade high.
The decision follows a notable decline in inflation since its peak in summer 2022, although many Americans still face elevated costs for essentials like groceries, fuel, and rent. The Fed stated, “In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range.” Chair Jerome Powell emphasized that “the time has come” for this action.
Throughout 2022 and 2023, the Fed raised rates at 11 consecutive meetings to combat rising prices, targeting an inflation rate of about 2%. As of August, inflation has dropped to 2.5%, the lowest since February 2021, although challenges remain in the labor market, raising concerns of a broader economic slowdown.
With the presidential election approaching, the strength and direction of the economy are critical issues for voters. Some Democratic senators urged the Fed to act sooner, arguing that delays have threatened economic stability. Political scrutiny is expected, particularly with Donald Trump previously pressuring the central bank during his presidency.
Other central banks globally, including the Bank of England, will closely monitor the Fed’s actions as they navigate their own monetary policies.