US Federal Reserve has cut its benchmark interest rate by half a percentage point, its first reduction in over four years. This substantial cut, which deviates from the more common quarter-point adjustments, hints at the central bank's growing concerns about its commitment to combating inflation.

Easing After Years of Tightening

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” the Federal Open Market Committee (FOMC) informed today (Wednesday). “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent and judges that the risks to achieving its employment and inflation goals are roughly in balance.”

The rate cut brings the federal funds rate down to a range of 4.75% to 5%, marking the start of the first easing cycle since the onset of the pandemic in 2020.

The decision followed over two years of aggressive rate hikes intended to curb inflation, which surged to 7% in 2022 before moderating to 2.5% in July 2024. The Fed's statement reflects optimism in inflation's progress toward the 2% target, though inflation remains high, the Financial Times reported.

Despite this confidence, Fed officials have acknowledged that risks remain. They emphasize the balance between maintaining price stability and supporting a healthy labor market, particularly as job gains slow and unemployment ticks up.

Not everyone on the Fed's board agreed with the aggressive cut. Michelle Bowman, a member of the FOMC, reportedly voted against the decision, advocating for a smaller quarter-point reduction, CNN reported. Bowman's dissent marked the first time a Fed governor has opposed a rate decision since 2005.

Significant Economic Shift

Fed's decision could follow a period of significant economic shifts, Reuters reported. Inflation, driven to a 40-year high by pandemic-related disruptions and subsequent policy responses, is now showing signs of moderation. The Fed's decision is expected to ripple through international markets as the scale of the rate cut could influence currency valuations and economic conditions globally.

A larger cut might weaken the dollar, potentially benefiting other currencies, but past trends suggest that initial rate cuts often strengthen the dollar. Markets in Asia, including South Korea and China, have already reacted to anticipated Fed changes, with significant movements in regional currencies, CNBC reported.

The timing of the Fed’s rate cut, coinciding with the buildup to the U.S. presidential election, adds another layer of complexity. The central bank’s approach could become a talking point in the election, influencing voter perceptions on economic management and cost-of-living issues.