The Federal Reserve cuts its key interest rate by half a percentage point for the first time since 2020

The US Federal Reserve announced on Wednesday that it would cut its benchmark interest rate by half a percentage point. This unusually aggressive move is intended to protect the economy from a further slowdown.

In announcing the rate cut, the central bank pointed out that employment growth had slowed while inflation had made further progress toward its two percent target.

In a subsequent press conference, Fed Chairman Jay Powell said the labor market and the economy in general remained in “solid shape.”

But with the larger cut, he said, “our intention is to keep the amount there.”

Although rising inflation, which has plagued the U.S. economy since the start of the Covid-19 pandemic, has largely cooled, the Fed's two percent target has not yet been reached, Powell noted.

However, the risk of a renewed price increase as a result of lower interest rates is minimal, he said.

“We are trying to get to a situation where we restore price stability without the painful rise in unemployment that sometimes accompanies this inflation,” Powell said. “That's what we're trying to do, and I think today's action can be seen as a sign of our strong commitment to achieving that goal.”

The federal funds rate, which serves as a benchmark for borrowing rates in the rest of the economy, will now fall to about 4.8%, the lowest level since March 2023.

The central bank also announced that it expects further interest rate cuts at its last two meetings of the year.

The markets reacted positively: Both the Dow Jones Industrial Average and the S&P 500 reached new all-time highs in trading on Wednesday afternoon.

In the run-up to the announcement, Wall Street traders had significantly increased the probability of a half-percentage point cut instead of the usual quarter-point cut.

Nevertheless, many analysts were surprised by the larger size.

“The Fed's decision to ramp up significantly is a unique move in history,” Seema Shah, chief global affairs strategist at Principal Asset Management, said in a note to clients Wednesday afternoon.

She continued: “Markets can and should only celebrate today's move – and will do so in the months ahead,” she wrote. “We have a Fed that will go to extremes to avoid a hard landing. Recession, what recession?

Brian Coulton, chief economist at Fitch Ratings, said the cut indicated “an abrupt return to the maximum employment mandate and a very significant improvement in confidence in the inflation outlook over the past month and a half.”

He said that despite seemingly steady payroll growth, the Fed was “perhaps more concerned than most about the state of the labor market.”

Lately, the economy continues to send mixed signals. The unemployment rate remains at a historic low of 4.2% – but it has risen slightly in four of the last five months, a trend that often precedes recessions. While layoffs remain low, hiring has virtually ground to a halt, particularly in some white-collar jobs, making job hunting unusually difficult for many.

A retail sales report released on Tuesday showed a stable spending pace overall in the US, although some spending categories such as restaurant spending were significantly weaker.

The Federal Reserve uses the federal funds rate as its main tool for regulating inflation and unemployment. A higher interest rate is intended to offset price growth, while a lower interest rate is intended to stimulate demand and increase hiring.

In response to rapidly rising inflation in the wake of the Covid-19 pandemic, the central bank began aggressive interest rate hikes in 2022.