The Fed Makes a Large Rate Cut and Forecasts More to Come

WASHINGTON — The Federal Reserve cut interest rates Wednesday by half a percentage point, an unusually large move and a clear signal that central bankers think they are winning their war against inflation and are turning their attention to protecting the job market.

“Our patient approach over the past year has paid dividends,” Jerome Powell, the Fed chair, said during his news conference. But now “the upside risks to inflation have diminished, and the downside risks to unemployment have increased.”

The Fed’s decision lowers rates to about 4.9%, down from a more-than-two-decade high.

The pivot comes in response to months of fading inflation, and it is meant to prevent the economy from slowing so much that the job market begins to weaken more painfully. Officials have been keeping a careful eye on a recent uptick in the unemployment rate, and by starting off with a big cut, the Fed is in effect taking out insurance against a bigger employment slowdown.

Reinforcing that cautious message, the decisive reduction came alongside economic projections that suggested a swifter pace of rate cuts than officials had envisioned just a few months ago. Officials now expect to make another half-point reduction before the end of the year.

“We’re going to take it meeting by meeting,” Powell said. “We made a good, strong start to this, and that is frankly a sign of our confidence, confidence that inflation is coming down.”

While Powell said that the Fed was not yet ready to declare “mission accomplished” on taming inflation, he added that officials were “encouraged” by the progress that they had seen.

Wednesday’s rate cut marks a preliminary victory. So far, Fed officials have managed to slow inflation notably without causing major economic problems. The unemployment rate has crept up, but it hasn’t jumped painfully. Hiring persists, though it has slowed. Consumer spending remains strong. Overall growth is still robust.

The resilience has made Fed officials hopeful that they might be able to pull off a historically rare “soft landing,” in which they manage to put the economy on a healthy and sustainable track without causing a recession.

“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes,” Powell said, after saying that he had “greater confidence” that the Fed could do it.

But the central bank’s task is not yet complete.

High interest rates slow the economy by making it more expensive to borrow to buy a house or expand a business, which weighs on demand and price increases. But they also hold back hiring. Given that, the Fed has been trying to strike a careful balance. Officials have aimed to slow growth enough to ensure that price increases return to normal without cooling it so much that the unemployment rate soars and the economy tips into a recession.

Policymakers must still decide how much and how quickly to lower interest rates in the coming months and years to reach that goal. That’s why Wednesday’s economic projections are notable: They provide a snapshot of what Fed officials expect to do next.

Fed officials predicted that they would cut interest rates to 4.4% by the end of the year — much lower than the 5.1% they had been expecting in June, when they last released economic estimates. And by the end of 2025, they expect to lower borrowing costs another full percentage point, to 3.4%.

For the White House, the Fed’s announcement Wednesday was encouraging. After years of rapid prices increases, the move marked a powerful declaration that a return to normal inflation was in sight.

“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” Vice President Kamala Harris, the Democratic nominee, said in a statement.

By contrast, the Fed’s decision to cut rates just weeks before the 2024 presidential election drew ire from former President Donald Trump, the Republican candidate.

“To cut it by that much, assuming they’re not just playing politics, the economy would be very bad, or they’re playing politics,” Trump said Wednesday, speaking to reporters in a cryptocurrency-related bar in New York City.

Fed officials make their decisions independently of politics, and policymakers have been adamant that they ignore the political calendar when making decisions. But even if they have little to no ability to control the Fed’s actions, incumbents typically want to see low rates on their watch.

Besides sending a positive signal about the economy — at least in this case — lower Fed rates also help consumers. Mortgage rates have already been coming down in anticipation of the central bank’s rate cuts, making buying a home a bit easier for the typical household. (They are unlikely to return to the rock-bottom levels that prevailed in 2020, because the Fed is not expecting to cut rates back to near zero.)

The Fed will have to proceed with caution in the months ahead.

Some economists have worried that the central bank is already at risk of falling behind, because unemployment has risen to 4.2%, which is low by historical standards but up notably from 3.4% in early 2023.

Others have worried that by cutting interest rates rapidly, the Fed might speed the economy back up, causing inflation to get stuck at an uncomfortably high level. One Fed governor, Michelle W. Bowman, voted against Wednesday’s cut. She would have preferred a smaller rate move.

Powell made clear during his news conference that the Fed was willing to speed up or slow down its path of rate cuts if the economy proves weaker or stronger than expected. Policymakers want to nail the landing, he suggested, and are increasingly hopeful that they can.

“The U.S. economy is in a good place, and our decision today is designed to keep it there,” Powell said.

But while the Fed cut marked a big moment — and a step along the way — economists and analysts said that it was still too early to declare that the Fed had pulled off the soft landing.

“Saying that right now is like saying you’ve landed as you’re still in the middle of a ski jump,” said Gennadiy Goldberg, head of U.S. rates strategy at T.D. Securities. “We’re still very much up in the air.”