The US Federal Reserve made a dramatic move on Wednesday night, cutting interest rates for the first time in over four years to help bolster the world’s largest economy. The central bank reduced rates by 0.5 percentage points—a larger-than-usual cut—marking the first such reduction since the onset of the COVID-19 pandemic in March 2020.
The Fed’s accompanying “dot plot” suggested that rates could be reduced by another half a percentage point before year’s end. The next rate decision is scheduled for November 7, following the US election on November 5.
This rate cut came just ahead of the Bank of England’s rate-setting meeting on Thursday, where policymakers are expected to keep rates steady after their own first rate cut in four years back in August.
Despite concerns about economic uncertainty, Fed Chairman Jerome Powell indicated that this significant rate cut was a positive signal in the fight against inflation, which he said is nearing the Fed’s 2% target. He reassured that the US economy remains strong, even as some worry it could be heading toward a recession.
Powell remarked: “Our patient approach over the past year has paid off. Inflation is now much closer to our goal, and we are more confident that it is moving sustainably toward 2%. The labor market is solid, and today’s policy is aimed at maintaining that strength.”
However, the timing of the rate cut, just two months before the US election, sparked criticism. Former President Donald Trump and his supporters claimed the decision was politically motivated. Trump suggested that such a large rate cut implies a struggling economy, adding, “The economy would be very bad” if the cut was not politically driven.
Trump has previously accused Powell of acting in favor of the Democrats, and Senator Tommy Tuberville also criticized the move as “shamelessly political,” suggesting it was intended to benefit Vice President Kamala Harris in her campaign.
Powell firmly denied any political influence, stating, “This is my fourth presidential election at the Fed, and we always focus on what is right for the people we serve, with no consideration of politics.”
The Fed’s rate cut, which lowered its target range to 4.75%–5%, was widely anticipated amid signs of slowing inflation and a cooling labor market. This marked the closest the Fed has come to a US election when beginning an easing cycle in nearly 50 years, with only two other instances in 1976 and 1984.
The decision was welcomed by markets, as the S&P 500 rose by as much as 0.6%, and the Nasdaq gained 0.8%. Powell also noted that the recent data points to an economy still growing at a solid pace, even as job growth in the US showed signs of slowing in July and August.
Inflation in the US currently stands at 2.5%, though concerns remain about ongoing price pressures, particularly in the housing market. Meanwhile, in the UK, inflation held steady at 2.2% in August, according to figures from the Office for National Statistics.
