Interest rate reduction to support Economic Stability
On September 18, 2024, the U.S. Federal Reserve took a significant step by cutting its benchmark interest rate by 50 basis points, or 0.5%, lowering the federal funds rate to a range of 4.75%-5.0%. This marked the first rate cut since 2020, following over two years of increases aimed at curbing inflation. The Fed’s decision reflects confidence that inflation, which peaked at 9.1% in June 2022, is now under control, with the current inflation rate falling to 2.5%—just above the Fed’s 2% target.
Economic implications and future rate cuts
The rate cut comes as the Federal Reserve shifts its focus from inflation control to bolstering the job market, which has shown signs of slowing. Unemployment remains relatively low at 4.2%, but growth has decelerated, prompting concerns about a potential recession. With the latest reduction, borrowing costs for consumers and businesses are expected to decline,
Moreover, the Fed has signaled the possibility of two additional cuts by the end of 2024, with further reductions anticipated in 2025 and 2026. These measures are designed to provide continued economic support and help stabilize the financial landscape.
Impact on markets and borrowers
Immediately following the rate cut, stock markets reacted with volatility, as investors weighed the potential benefits against concerns about slower economic growth. While lower interest rates tend to ease borrowing costs, inflationary pressures on essentials such as food and housing remain a challenge for many Americans.
As the Fed continues its efforts to strike a balance between fostering economic growth and keeping inflation in check, further adjustments to interest rates may follow in the months to come.
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