What the first interest rate cut in 4 years means for the Fed’s fight against inflation

The Federal Reserve cut interest rates for the first time in four years with an aggressive move that lowers its benchmark rate by a half percentage point. The Fed also said it intended to lower interest rates by a full point before the year is out. Amna Nawaz discussed the decision and what it could mean, with David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy.
Amna Nawaz:
Welcome to the “News Hour.”
The Federal Reserve cut interest rates today for the first time in four years with an aggressive move that lowers its benchmark rate by a half-percentage. The Fed also said it intended to lower interest rates by a full point before the year is out. Fed Chair Jerome Powell said now is a good moment to make cuts and boost the jobs market.
Jerome Powell, Federal Reserve Chairman:
The U.S. economy is in good shape. It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong pace. We want to keep it there. That’s what we’re doing.
Amna Nawaz:
For more on what’s behind this decision and what it could mean, I’m joined by David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
David, good to see you.
David Wessel, Brookings Institution:
Good to see you.
Amna Nawaz:
So this decision to cut interest rates by a half-percentage point, not a quarter-point, as some had speculated, what’s behind that? And why now?
David Wessel:
I think the Federal Reserve realized that the labor market is softening or the metaphor that Jay Powell used today is cooling.
And they’re looking ahead and they don’t want it to cool anymore. They expect the unemployment rate to rise a little bit more, but they want to act preemptively to prevent the labor market from going ahead and getting worse, because they think they have basically won the war against inflation.
My friend Jason Furman, former Obama adviser, said this is as close to mission accomplished as you’re ever going to hear from the Fed.
Amna Nawaz:
There has been some suggestion, as you have heard, too, that they’re making a bigger cut now because they may have been slow to recognize the potential economic slowdown and are now trying to catch up. Do you see any validity to that?
David Wessel:
Absolutely.
I mean, a lot of people thought they should have begun cutting rates in July, and Fed Chair Powell was asked about that today in the press conference, and he sort of said, well, if I had seen the numbers I saw right after the meeting, maybe we would have.
So, yes, absolutely. They may be a little bit behind the curve, but they don’t want to be very far behind the curve.
Amna Nawaz:
So this does now lower federal fund rates to between 4.75 and 5 percent. What does this mean for everyday Americans, how they’re going to feel the cuts when it comes to mortgages and credit cards and auto loans?
David Wessel:
Right.
So, one of the ways that monetary policy works is through financial markets, and financial markets have been anticipating a rate cut. They have signaled, the Fed has signaled it pretty aggressively. So mortgage rates have come down from about 7.2 percent to 6.2 percent for a 30-year mortgage.
Auto rates have basically begun to come down after going up a lot, not much. Rates on credit cards haven’t come down much at all. They went from 17 percent to 22 percent on average on a credit card loan, but they will now start to come down.
So, every — all the rates that consumers pay will gradually come down as the bond market adjusts to this new Fed posture. Of course, on the other side, people who have savings and money market funds are going to get less interest.
Amna Nawaz:
The Fed has been pretty aggressive or they were, rather, pretty aggressive in raising rates over the last few years. Does today’s more aggressive decision suggest they will be equally aggressive in cutting rates in the months ahead?
David Wessel:
I don’t think so.
The Fed was aggressive in raising rates because they were really surprised by how virulent inflation was. And now they’re going to move cautiously. As Jay Powell always says, you don’t want to do too much, you don’t want to do too little.
Plus, it’s pretty clear from what people have said, Fed officials have said, and it’s some of the predictions that they made when they published today, that not all members of the Federal Open Market Committee are happy with moving this fast. So he may — Jay Powell may be constrained a little by internal politics.
Amna Nawaz:
As you well know, the economy is the number one issue for American voters. We are weeks away from a presidential election. We did hear the Republican nominee today, former President Trump, suggest that the Fed could be playing politics here.
How do you look at that issue?
David Wessel:
Well, look, this is — this was inevitable. Whatever they did, they’re going to be accused of doing something to try and tilt the election. If they’d done too little, the Democrats would have said you’re holding back because of the election.
I think the bottom line is I actually believe the Fed that they’re doing what they think is necessary for the economy. They’re trying to avoid thinking about the timing of the election. People don’t believe that, but that’s why we have an independent Central Bank with kind of technocratic leadership, so they can do what’s right for the economy.
They know they’re going to get grief from the Republicans, although the Republicans are a little bit ambivalent. Speaker Johnson today said, well, I don’t think they should have done it so close to the election, but I’m glad they did it. Not exactly a clear message.
Amna Nawaz:
You also well know the inflation rate is not yet at that target of 2 percent we know they’re working towards.
Fed officials say part of the reason behind the move today is they have gained confidence it is moving sustainably towards that target. Is it basically a downward trajectory here when it comes to those inflation rates or are there unknowns ahead that mean inflation could take back up?
David Wessel:
There are always unknowns. That’s the nature of the economy.
But it looks like we’re on a steady downward trend. A lot of the supply-side issues that made prices go up have abated. The labor market is softening. The level of wage increases is just starting to come down. So I think the Fed is right to be confident.
Plus, if they get a little over 2 and they gradually get to 2 percent between now and the next five years, they will think this is a victory; 2.0 percent is a good target, but it’s not a magic number. I think they were waiting so they could actually say the first number was a 2 and that would give them the freedom to do what they did today.
Amna Nawaz:
David Wessel of the Brookings Institution, thank you for helping explain it to us all. Appreciate you. Good to see you.
David Wessel:
You’re welcome.