The Federal Reserve lowered its benchmark interest rate by 50 basis points to a range of 4.75%-5%, signalling an aggressive pivot to support the US labour market. This marks the first rate cut after maintaining the highest level in two decades. A narrow majority of policymakers, 10 of 19, anticipate further rate cuts of at least half a percentage point in the two remaining meetings of 2024. The Fed’s statement indicates growing confidence that inflation, now at 2.5%, is approaching its 2% target, allowing a shift towards supporting employment.

The Federal Open Market Committee (FOMC) vote was 11 to 1, with Governor Michelle Bowman dissenting in favour of a smaller, quarter-point cut. This marks the first dissent from a Fed governor since 2005. The decision reflects rising concerns over labour-market conditions, as unemployment is projected to rise slightly to 4.4% by the end of 2024. Despite this, inflation is forecasted to fall to 2.3% by the end of 2024, although policymakers don’t expect it to hit the 2% target until 2026.

The move begins a new chapter for the Fed, which has raised rates 11 times since 2022 to combat high inflation driven by supply chain disruptions and increased consumer demand. While inflation has cooled, economic uncertainty persists, with rising job losses and delinquency rates signaling potential economic strain. Divisions within the Fed highlight the challenge of balancing further rate cuts to boost employment while preventing a resurgence of inflation.