The Federal Reserve (Fed), the central bank of the United States, has implemented its first interest rate cut in 4.5 years, signaling the end of its tight monetary policy aimed at curbing inflation.

On the 18th, after concluding its two-day Federal Open Market Committee (FOMC) meeting, the Fed announced its decision to lower the benchmark interest rate by 0.5 percentage points, from the previous range of 5.25-5.50% to 4.75-5.0%. This significant reduction is referred to as a “big cut.”

The historic 2.0% point interest rate gap between South Korea (3.50%) and the US (5.25-5.50%) has now narrowed to a maximum of 1.5%.

This interest rate cut is the first since March 2020, when rates were rapidly lowered to address the economic impact of the COVID-19 pandemic.

In its statement, the Fed noted that “recent indicators suggest that economic activity is continuing to expand at a solid pace,” adding that “while job gains have slowed and unemployment has risen, it remains low.” The Fed further assessed that “inflation has made additional progress towards the FOMC’s 2% goal but remains elevated.” However, they also stated that “the FOMC has gained more confidence that inflation is sustainably moving towards 2%, and the risks to employment and inflation goals are now more balanced.”

The Fed emphasized that it will “continue to carefully evaluate the incoming data, evolving outlook, and risks as it considers further adjustments to the target range for the federal funds rate.”

Additionally, the Fed’s "dot plot" projection lowered the year-end median interest rate forecast from 5.1% to 4.4%, signaling another potential 0.5% rate cut by year’s end.

Looking further ahead, the median forecast for the federal funds rate at the end of 2025 is 3.4% (down from the June forecast of 4.1%), and by the end of 2026, it is expected to be 2.9% (compared to 3.1% in June). The long-term forecast for after 2028 was revised up by 0.1% to 2.9%.

The Fed also adjusted its real GDP growth forecast for 2024, lowering it from 2.1% (June projection) to 2.0%. The unemployment rate for the end of 2024 is now expected to be 4.4%, a 0.4% increase from the June forecast of 4.0%.

The Fed also reduced its year-end forecast for the Personal Consumption Expenditures (PCE) inflation rate to 2.3%, down from 2.6% in June, and the forecast for core PCE inflation (which excludes volatile food and energy prices) to 2.6%, down from 2.8%.

Previously, the Fed had aggressively raised interest rates, bringing them to the highest level in 22 years, reaching 5.25-5.50% by July last year, in response to inflation driven by pandemic-related stimulus and supply chain disruptions. The Fed had kept the rate unchanged for eight consecutive meetings after that.

This recent rate cut is seen as marking the end of the Fed's tightening monetary policy aimed at controlling inflation.

With the U.S. presidential election just 48 days away, the rate cut is expected to draw contrasting reactions from the Democratic and Republican parties. Vice President Kamala Harris, a Democratic presidential candidate, is expected to tout this as a success in reducing inflation. Meanwhile, Republican candidate and former President Donald Trump is likely to criticize the decision, viewing it as a politically sensitive move that could benefit the opposition.

Trump had previously expressed opposition to the Fed cutting rates ahead of the election.

Source: Yonhap News