The Federal Reserve cut interest rates by 50 points, signaling there may be worries about a US recession coming.
The US Federal Reserve cut interest rates by 50 basis points in its meeting on Thursday. This is the first time the Fed has cut rates since early 2020 and marks a major turning point in the future of American monetary policy.
Interest rates on the US dollar are now at 4.75-5%, down from the previous 5.25-5.5%, a 23-year high. The Fed also revised the dot plot, a scheme outlining the future monetary policy, with a more dovish approach. The Fed now predicts another half-point rate cut later this year, reaching interest rates of 3.4% by the end of 2025.
In his statement, Fed’s Chairman Jerome Powell said the Federal Open Market Committee remains focused on inflation reaching its 2% target.
The Federal Reserve brought interest rates to a 23-year high following a worrying surge in US inflation, which reached a peak increase of 9.2% year-on-year in June 2022. Prices in the United States are now roughly 20% higher than during the pandemic.
In recent months, however, the US economy showed signs of weakness. The unemployment level rose by 0.8% in August compared to the year prior, and GDP growth is slowly declining despite still proving resilience.
The 50-point cut was necessary to revitalize the economy. However, some analysts still worry the United States will fall into recession in the next 12 months.
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Is a US recession coming?
In the past few weeks, markets were torn between the probabilities of a 25 vs 50-point cut. The Federal Reserve was very reclusive about its final decision, not to stir markets uncontrollably for no reason. In the end, the decision to cut rates by half a point was reached almost unanimously, with only one member voting against it.
Immediately following the announcement, the S&P 500 headed to new historic highs, as it did many other times before this year.
On the other hand, the US dollar value is reaching new lows. Many analysts are quick to remind the Fed had just started cutting rates before the recession hit in 2008.
Historically, the economy feels the full effect of rate cuts with months of delay. This means the full negative causes rates had in this cycle may not be completed yet. A counterargument to this view is that the Fed brought rates to their highest level in July 2023. That left over 14 months for the full effects to take place, therefore it’s entirely possible nothing more will come.
