- US Federal Reserve lowers rates by 0.50%.
- This is the first rate cut since March 2020.
- 11 of 12 Fed members voted for the decision.
- US dollar showing limited movement.
Fed Lowers Rates with Deep Cut
The Federal Reserve lowered interest rates on Wednesday by 0.50%, or 50 basis points, bringing the benchmark interest rate to a target range of 4.75 percent to 5.50 percent. The decision was almost unanimous, with 11 Fed members voting for a 50 bps move and a lone vote for a 25 bps cut. It was the Fed’s first rate cut in 4.5 years.
Federal Reserve decisions are usually predictable events, with Fed members signaling their intentions ahead of time to minimize market volatility. This decision was a notable exception, as it was a coin toss right up to the rate announcement as to whether the Fed would cut by 25 or 50 basis points.
The Fed has signaled for weeks that a rate cut was coming and traditionally, rate moves in either direction are in 25-bps increments. With the battle against inflation largely won, the Fed likely planned a modest 25 bps move. What complicated matters was the unexpected deterioration in the US labor market, as job growth has fallen sharply and unemployment has jumped in recent months. In the end, concern over the weakening labor market prompted the Fed to act aggressively and kick off the new rate-tightening cycle with an oversize rate cut.
The Fed’s ‘dot plot’, a chart which signals the expected rate path in the next few years, indicated 50 more basis points by the end of the year. In his press conference after the decision, Fed Chair Jerome Powell tried to reassure the markets that the deep cut did not mean that the economy was in trouble and that the rate cut would keep inflation in check and ensure that the labor market remains solid.
US Dollar Lower, Stock Market Pare Gains
The currency markets showed some volatility in the aftermath of the Fed’s rate decision, as the US Dollar lost ground but then recovered most of the losses on Wednesday.
The US Dollar is slightly lower on Thursday against most of the majors. The Australian dollar, however, is up sharply today. The AUD/USD currency pair has jumped 0.82% and climbed as high as 0.6830, its highest level this year. The NZD/USD currency pair is up 0.57% today, an indication that risk appetite has climbed in response to the Fed’s rate cut.
The major stock indices initially posted gains on Wednesday but could not consolidate and ended the day down slightly.
The S&P 500 Index rose as much as 0.60% on Wednesday but headed lower and ended the day down 16.32 points (0.29%) and closed at 5618.26.
The Nasdaq 100 Index surged as much as 0.9% on Wednesday but then reversed directions and ended the day down 87.90 points (0.45%) and closed at 19,344.49.
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