The US Federal Reserve on Wednesday lowered its benchmark interest rate by half of a percentage point, the first cut in 4 1/2 years, in a major policy shift less than seven weeks away from the presidential election.
After the two-day Federal Open Market Committee (FOMC) meeting, the central bank announced the decision to reduce the rate to the 4.75 to 5.0 percent range from its 23-year high, putting an end to its post-pandemic tightening cycle.
FOMC members' new median economic projections showed that the federal funds rate would be cut to 4.4 percent at the end of this year – a hint that the Fed could further lower the rate later this year.
The rate reduction came as inflation has been getting closer to the Fed's target of 2 percent. Last month, annual consumer inflation fell to 2.5 percent.
The latest median projections indicated that Personal Consumption Expenditures (PCE) inflation may fall to 2.3 percent at the end of this year and 2.1 percent at the end of next year.
During a press briefing, Fed Chair Jerome Powell said that the central bank has "in fact begun the cutting cycle now" while highlighting that the US economy is "in a good shape."
"Our decision today is designed to keep it there. More specifically, the economy is growing at a solid pace. Inflation is coming down closer to our 2 percent objective over time, and the labor market is still in solid shape. Our intention is really to maintain the strength that we currently see in the US economy," the chair said.
"We will do that by returning rates from their high-level ... We're going to move those down over time to a more normal level," he added.
But he said "no" to a question of whether the central bank effectively declared a decisive victory over inflation.
"The goal is to have inflation move down to 2 percent on a sustainable basis. We are close, but we are not really at 2 percent," he said.
"We are not saying mission accomplished or anything like that. But I have to say though we're encouraged by the progress that we have made."
From March 2022 to July last year, the central bank raised the key rate 11 times under an aggressive campaign to cool inflation that hit a peak of 9.1 percent in June 2022.
After the hikes, the Fed kept the rate steady eight consecutive times.
This week's Fed rate cut put the gap between the key rates of South Korea and the United States at 1.5 percentage points.
The timing of the rate cut has been anticipated by both consumers and businesses as it will lower their borrowing costs – a reason why it has taken on political overtones during the election season.
Republican presidential candidate Donald Trump opposed a rate reduction close to the general election, saying in a Bloomberg News interview in May, "It's something that they know they shouldn't be doing."
But for his Democratic rival, Kamala Harris, the rate cut could be a boost for her campaign given that the reduction signals that the fight against inflation has fared well.
Mindful of the political discourse, Powell underlined that the Fed is not "serving any politician" but is working for "all Americans."
"Countries that are democracies around the world ... all have what are called independent central banks, and the reason is that people have found over time that insulating the central bank from direct control by political authorities avoids making monetary policy in a way that favors, maybe, people who are in office," he said.
"I think the data are clear that countries that have independent central banks, they get lower inflation. We do work to serve all Americans. We are not serving any politician, any political figure, any cause, any issue, nothing," Powell added.
In a social media post, President Joe Biden commented on the rate reduction.
"We just reached an important moment: Inflation and interest rates are falling while the economy remains strong," he wrote on X, formerly Twitter. "The critics said it couldn't happen – but our policies are lowering costs and creating jobs." (Yonhap)
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