Fed Cuts Interest Rates by 0.5% for First Time in 4.5 Years, Hints at Further Cuts This Year

Jerome Powell, Federal Reserve Chairman Washington/Reuters Yonhap News

The U.S. Federal Reserve has reduced its benchmark interest rate by 0.5 percentage points for the first time in 4.5 years. This move comes amid ongoing economic expansion and suggests the possibility of additional rate cuts later in the year. The change has narrowed the interest rate gap between the U.S. and South Korea.

On September 18, 2024, the U.S. Federal Reserve (Fed) announced a 0.5 percentage point reduction in its benchmark interest rate. The rate was lowered from 5.25–5.50% to 4.75–5.00%, marking the first cut since March 2020, when the Fed began lowering rates to combat the inflation surge caused by the COVID-19 pandemic.

In a statement following the Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell noted that recent indicators suggest continued robust economic expansion. While job growth has slowed and the unemployment rate has risen slightly, it remains at a low level. The Fed expressed confidence that inflation is moving steadily towards the 2% target and that risks related to achieving employment and inflation goals are balanced.

The Fed had been raising rates steadily from March 2022 until July 2023, reaching the highest level in 22 years. With South Korea's current benchmark rate at 3.50%, the rate gap between the two countries has decreased from 2.00 percentage points to 1.50 percentage points.

The Fed’s updated dot plot, which provides individual members’ interest rate projections, indicates a revised year-end forecast for the benchmark rate, lowered from 5.1% to 4.4%. This suggests the potential for an additional 0.5 percentage point cut by the end of the year.

Inflation, as measured by the Personal Consumption Expenditures (PCE) index, is expected to rise by 2.3% by the end of this year, down from the 2.6% projected in June. However, the unemployment rate forecast for the end of the year has increased to 4.4%, up from the previous estimate of 4.0%. The growth rate for real GDP is projected to be 2.0%, slightly lower than the June estimate of 2.1%.

The Fed’s decision was anticipated by the market, but the 0.5 percentage point cut came as a surprise to many economists. The easing of inflation due to recovering supply chains and increased labor market participation has reduced the need for tight monetary policy. Powell noted that if inflation remains persistent, the Fed could proceed with policy adjustments more gradually.

This rate cut, announced just over a month before the U.S. presidential election in November, is expected to draw divergent reactions from political parties. Democratic candidates, such as Vice President Kamala Harris, are likely to view the move as a positive signal of inflation control, while Republican candidates, including former President Donald Trump, have argued against rate cuts before the election.

The Federal Reserve's recent rate cut reflects ongoing economic strength and aims to manage inflation effectively. The potential for further rate reductions later in the year and the narrowing interest rate gap with South Korea are key factors to watch in the coming months.