The US Fed cuts more by half a point in the first reduction since 2020

• The news will likely be positive for Democratic candidate Kamala Harris.
• Policymakers voted 11 to 1 in favor of cutting the benchmark rate.
• Analysts had expected the Fed to adopt an aggressive stance as inflation has eased.

The U.S. Federal Reserve cut its key lending rate by half a percentage point on Wednesday, its first cut since the start of the Covid-19 pandemic, sharply reducing borrowing costs ahead of November’s presidential election.

The Fed’s decision will affect the rates at which commercial banks lend to consumers and businesses, lowering the cost of borrowing for everything from mortgages to credit cards.

The news will likely be well received by Democratic candidate Kamala Harris, who has sought to highlight President Joe Biden’s economic record in her race against Donald Trump.

Policymakers voted 11 to 1 to cut the U.S. central bank’s benchmark interest rate to between 4.75 percent and 5 percent, the Fed said in a statement.

The main holdout was Fed Governor Michelle Bauman, who advocated a more conventional cut of quarters.

Fed ‘gained more confidence’

The Fed said its rate-setting committee “has grown more confident that inflation is moving sustainably toward 2 percent and judges that the risks to achieving its employment and inflation targets are roughly balanced.”

The bank has a dual mandate from Congress to act independently to address both inflation and employment.

Analysts had expected the Fed to cut interest rates on Wednesday as inflation eases toward the bank’s long-term target of 2 percent, and the labor market continues to cool in the surprisingly resilient post-Covid economy.

But they were very uncertain about the size of the move, with some expecting a small cut of a quarter of a percentage point and others predicting a more significant half-point cut, which carries a greater risk of a resurgence of inflation.

In updated economic forecasts released alongside the Fed’s rate decision, policymakers’ median forecast put the unemployment rate at 4.4%, on average, in the fourth quarter of this year, up from 4% in the last update in June .

They also reported annual headline inflation of 2.3%, slightly lower than in June.

The decision to make steeper cuts initially caught some analysts by surprise.

“In our base case, the Fed cuts 25 basis points but signals 100 basis points of cuts this year with the median ‘dot’ in 2024,” Citi economists wrote in an investment note published ahead of the rate decision.

Electoral stakes

The Fed’s mandate gives it the independence to set monetary policy solely on the basis of economic data.

However, her decision will likely have political ramifications given the importance of inflation and the cost of living to US consumers.

Americans have repeatedly said both are top concerns ahead of the election.

Trump has repeatedly criticized Fed Chairman Powell, who he first appointed to lead the Fed, and has suggested that her decisions are political – accusations that the US central bank has strongly denied.