The Federal Reserve’s choice was a “big cut.” On the 18th, the Fed announced during the Federal Open Market Committee (FOMC) meeting, which was held for two days starting the previous day, that it would lower the benchmark interest rate from the current 5.25%-5.5% to 4.75%-5.0%, a 0.5 percentage point cut.

This is the first time the Fed has lowered interest rates in four and a half years since the pandemic. The Fed had aggressively raised interest rates since March 2022 to curb inflation, bringing them to their highest level in 22 years. After keeping rates steady for over a year since July last year, the Fed has now taken its first step toward a rate cut. It’s a policy shift (pivot) after 30 months since the start of aggressive rate hikes and a rate cut 14 months after freezing rates at their highest level.

Although the Fed had delayed rate cuts despite increasing calls from the market, stating it needed “confidence that inflation is declining to the Fed’s target of 2%,” it has now officially signaled to the world that it is shifting toward easing monetary policy. In its policy statement, the Fed explained the rationale for the cut, stating, “The Committee has gained greater confidence that inflation is sustainably heading toward 2%,” and adding that “the two goals of price stability and (maximum) employment are generally balanced.”

The Fed also hinted that future rate cuts this year would be gradual, opting for a 0.25 percentage point reduction. In the economic outlook report released after the September meeting, the Fed’s dot plot (which shows the forecast for the federal funds rate) projected a rate of 4.4% by the end of 2024. This suggests that the Fed is planning to execute a total of 0.50 percentage point cuts during the remaining two meetings this year. The Fed has two FOMC meetings left this year, scheduled for November 6-7 and December 17-18. Market experts believe that, given the Fed’s conservative nature, it is likely to opt for gradual cuts of 0.25 percentage points in each of the remaining meetings. The Fed also set its target rate for 2024 at 3.4%, which indicates a total of 1 percentage point cut next year. In the dot plot released in June, most Fed members projected the rate to be 4.1% by the end of 2025.

Regarding this, Jerome Powell, the Fed Chair, indicated during the press conference following the FOMC meeting that the Fed is not in a hurry to lower rates and that additional cuts would be gradual. Powell stated, “This decision reflects our growing confidence that we can maintain a strong labor market amid moderate growth and inflation continuing to decline toward 2%.”

He added, “While other central banks were cutting rates, we waited, and I believe our patience has paid off as we gained confidence that inflation is steadily declining to 2%.” He explained that this was the background that enabled today’s strong action. However, he also cautioned that this “big cut” should not be seen as a “new pace,” tempering the market’s excessive expectations for additional rate cuts.

When asked about the possibility of returning to zero interest rates, he said, “In my personal view, it seems unlikely that we will return to that state, but we’ll all know later.” He added, “I feel that the neutral rate has probably risen significantly compared to the past.”

Meanwhile, the Fed predicted that inflation would improve more than previously expected. The year-end forecast for core personal consumption expenditures (PCE) inflation was lowered from 2.8% to 2.6%. The U.S. economic growth forecast remained similar to that of June. The GDP growth rate for this year was revised slightly down to 2.0% from 2.1% in June. The growth rate for the following years is expected to remain at 2.0%, the same as the June forecast.

<Hongyong Park>