The US central bank cut interest rates more than expected

Following the decision made at the Federal Open Market Committee (FOMC) meeting, the range of the Fed's federal funds rate has been reduced from 5.25-5.50 percent to 4.75-5 percent. Economic forecasts released at the same time suggest that two more cuts of 25 basis points are expected this year.

The move will bring relief to borrowers across the United States who have been struggling with interest rates that have remained at their highest level in more than two decades.

The decision of the US central bank – announced in August by its president Jerome Powell – is a response to the economic slowdown in USAa slight increase in unemployment and a consistently weakening Inflation. Despite this, it was not entirely clear whether the cut would be 25 basis points or 50.

This is the first rate cut after a series of unprecedentedly rapid increases that began in February 2022 – from 0.25 to 5.25 over a year and a half – to combat inflation. The last cut was introduced in March 2020 in response to the economic chaos related to the COVID-19 pandemic.

The market consensus was that Wednesday interest rate cut in the United States will amount to 25 bps, although in recent days the market has seen an increase in expectations for a stronger cut, by 50 bps. As indicated by Piotr Popławski, economist at ING Bank Śląski, the domestic market will be able to react to the Fed's decision only on Thursday morning. – Then we will have a series of data from the country, but generally until the end of this week we will be under the influence of the Fed's decision and the macroeconomic projections published along with it – he said.

“In light of progress on inflation and the balance of risks, the Committee has decided to lower the target range for the federal funds rate by half a percentage point to a range of 4.75 to 5.00. The Committee will carefully evaluate incoming data, the changing outlook, and the balance of risks as it considers additional adjustments to the target range for the federal funds rate. The Committee will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities. The Committee remains strongly committed to supporting maximum employment and returning inflation to its 2 percent objective,” the statement said after the meeting.

“The Committee is committed to achieving maximum employment and inflation of 2 percent over the longer term. The Committee has increased confidence that inflation is sustainably moving toward 2 percent and assesses that risks to achieving the employment and inflation targets are broadly balanced. The economic outlook is uncertain, and the Committee notes risks to both sides of its dual mandate,” it added.

The Fed indicated that inflation was making progress toward its 2 percent target.

“Recent data suggest that economic activity continues to expand at a solid pace. Employment growth has slowed and the unemployment rate has risen but remains low. Inflation has made further progress towards the Committee's 2 percent target but remains somewhat elevated,” the statement said after the meeting.

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee will be prepared to adjust the stance of monetary policy as necessary if risks emerge that could impede the achievement of the Committee's objectives. The Committee's assessment will take into account a broad range of information, including readings on labor market conditions, inflationary pressures and expectations, and financial and international developments,” it added.

In September, the FOMC forecast interest rates at 4.4% at the end of 2024, 3.4% at the end of 2025, 2.9% at the end of 2026 and 2.9% at the end of 2027. In June, the Fed forecasted U.S. interest rates at 5.1% at the end of 2024, 4.1% at the end of 2025 and 3.1% at the end of 2026. The Fed presented its forecasts for 2027 for the first time.