The Federal Reserve cut benchmark interest rates by half a percentage point yesterday, signaling its confidence that inflation in the country has been effectively tamed. With inflation continuing to fall for months, the Fed explained its move as a response to gathering concerns over the potential impact of high interest rates on employment. (New York Times)
Our Take
The Fed was widely expected to lower interest rates, which at 5.4 percent were the highest they’d been since just before the global financial crisis in 2007. But the half-point reduction exceeded what most analysts had been expecting. For a Fed that had been seen by many as overly cautious in its rate policy, it reflects the consensus that the threat from inflation has now receded. After having reached a 12-month average of over 9 percent in June 2022—the highest rate since 1980—inflation has now eased off to a manageable 2.5 percent.
Much of that spike was related to the effect and aftermath of the pandemic, including supply chain disruptions and demand surges, as well as fiscal stimulus measures and price gouging. The rise in global energy and food prices due to the war in Ukraine also played a major role.