The Federal Reserve moved to cut interest rates by a half percentage point—the first reduction since the central bank cuts rates to near zero in 2020—in a vote of confidence that inflation will continue to moderate and an attempt to fend off a further increase in unemployment.
Senator Elizabeth Warren (D-MA) and other Democrat lawmakers had called on Powell to cut rates more aggressively, urging the Fed in a letter to reduce its benchmark federal funds rate by three-quarters of a percentage point.
The decision to lower rates reflects increased confidence on the part of Fed officials that inflation is moving sustainably toward their two percent target.
Fed officials have also said that they now view the risks to their mandate to maintain full employment to be greater than the risks of a resurgence of inflation. Earlier this summer, the unemployment rate tripped the Sahm Rule threshold by rising more than a half a percentage point above its recent low, typically a signal that the economy is already in a recession. Claudia Sahm, whose research is behind the rule, has said she does not think the economy is currently in a recession but worries that restrictive monetary policy could unnecessarily increase unemployment even more.
Evidence for a weakening labor market, however, has been scarce. Hiring in June and July disappointed and revisions showed it was weaker than expected. But, at least in the government’s preliminary estimate, payroll growth rebounded in August. Layoffs have been low, with jobless claims last week around where they were a year ago.
Both retail spending and industrial production came in better than expected in August, according to reports released this week.
The last time the Fed began cutting rates prior to the pandemic, in July 2019, the benchmark rate was a range of two percent to 2.25 percent. The Fed began cutting then as a pre-emptive strike to stave off what it feared would be a looming global slowdown and ameliorate any damage to the economy from trade tensions.
