The Federal Reserve cuts interest rates by 50 basis points

On Wednesday, September 18, Eastern Time, the Federal Reserve announced a 50 basis point rate cut, lowering the target range of the federal funds rate from 5.25% to 5.5% to 4.75% to 5%. This is the first rate cut since the Fed started this round of tightening cycle in March 2022. From March 2022 to July last year, the Federal Reserve raised interest rates 11 times in more than a year, with a cumulative rate hike of 525 basis points.

This rate cut was in line with expectations, but what surprised some market participants was the extent of the cut. The market had fully expected a rate cut, but there were differences on the extent of the cut. CME tools show that the futures market expects the probability of the Federal Reserve cutting interest rates by 50 basis points this week to be 63%, only 34% a week ago, and the probability of a 25 basis point cut has dropped from 66% a week ago to 37%.

The Federal Reserve Committee (FOMC) wrote in a statement that recent indicators show that economic activity continues to expand at a steady pace, job growth has slowed, the unemployment rate has risen but is still low, and inflation has made further progress toward the 2% target, but it is still a bit high. Unlike last time, the FOMC changed employment from "stable" to "slowing";

In view of inflation progress and risk balance, the FOMC decided to lower the target range of the federal funds rate by 0.5 percentage points (or 50 basis points) to 4.75% to 5%. When considering further adjustments, the committee will carefully evaluate the incoming data, the evolving outlook, and the balance of risks.

The FOMC will continue to reduce its holdings of U.S. Treasury bonds, agency bonds, and agency mortgage-backed securities (i.e., balance sheet reduction). The FOMC once again emphasized that the committee is firmly committed to supporting full employment and restoring the inflation rate to the target of 2%.