Reuters :
The Federal Reserve cut US short-term borrowing costs on Wednesday by a bigger-than-usual half percentage point, a watershed moment that should start to ease some of the financial pressures everyday consumers have felt over the two and a half years that the central bank has battled with high inflation.
The Fed, after 5.25 percentage points of increases between March 2022 and July 2023, lowered its key rate to 4.75 percent-5 percent to address rising worries about the cooling labor market.
Financial markets are now pricing in the central bank to keep lowering rates to around 4 percent-4.25 percent by the end of the year, with more cuts in 2025.
Fed policymakers have said that they don’t see the policy rate returning to the sub-2 percent levels that prevailed for more than a decade before 2022. That era’s low mortgage rates, often under 4 percent, aren’t coming back any time soon.
Still, a lower policy rate should translate to cheaper borrowing costs for most kinds of loans while, on average, paychecks are now rising faster than prices as inflation has cooled substantially. Even so, each trip to the grocery store is a reminder that today’s dollars don’t go as far they did just a few years ago.
So how will rate cuts affect ordinary Americans?
SOFTENING THE LANDING
The Fed’s aggressive rate hikes, begun only after inflation had surged, were initially expected to cause an economic slowdown resulting in job losses.
Instead, the economy so far has averted recession, even as inflation by the Consumer Price Index dropped to 2.5 percent from a mid-2022 peak over 9 percent. Employers kept hiring, and the unemployment rate, even with its recent rise to 4.2 percent, is still low by historical standards.
In cutting rates, the Fed is trying to keep it like that. Already, hiring and wage growth have slowed, the number of job openings per worker has dropped, job search times are lengthening, and the number of workers settling for part-time work when they prefer full-time employment has risen.