Borrowers Rejoice: Fed Cuts Interest Rates for First Time Since 2020

The central bank’s Federal Open Market Committee has made its decision. The Federal Reserve is cutting the benchmark federal funds rate by 50 basis points amid progress in the fight against inflation. Inflation slowed to 2.5% in August based on the Labor Department’s consumer price index (CPI). This figure is still above the Fed’s 2% target, but with the ease of inflationary pressures and the slowing labor market posing a growing risk to economic expansion, Fed officials opted to act. The FOMC’s decision drops the federal funds rate to 4.75% to 5% – down from 5.25% to 5.5%, its highest level in 23 years. This unusually large, half-percentage-point cut is the first time that the Fed has cut interest rates in over 4 years with the last rate cut occurring in March of 2020.

Catch-up hiring following the health crisis has largely run its course, pandemic-related labor shortages have eased, and many businesses have curtailed hiring and investment because of high financing costs. Low- and middle-income households are feeling the effects as they cope with astronomical home prices, record credit card debt, and high delinquency rates. The interest rate reduction is expected to provide the first dose of relief in years to Americans who have struggled with high borrowing costs for things like mortgages, auto loans, and other loans whose rates are influenced by the Fed’s benchmark. Borrowers are likely to see an even bigger impact if the Fed continues to cut interest rates in the coming months. Fed policymakers anticipate the equivalent of four more quarter-point cuts next year and another two in 2026, according to their median estimate. That prediction would reduce the key rate to about 2.9% by the end of 2026, equivalent to 250 basis points worth of cuts in the next two years. There are two more policy meetings on the Fed’s schedule this year – Nov. 6-7, just after Election Day on Nov. 5; and Dec. 17-18, when the Fed will release its next summary of economic projections.