The Federal Reserve lowered its benchmark interest rate by a half percentage point Wednesday, an aggressive start to a policy shift aimed at bolstering the U.S. labor market.

Projections released following their two-day meeting showed a narrow majority, 10 of 19 officials, favored lowering rates by at least an additional half-point over their two remaining 2024 meetings. Seven policymakers supported another quarter-point rate reduction this year, while two opposed any further moves. 

The Federal Open Market Committee voted 11 to 1 to lower the federal funds rate to a range of 4.75% to 5%, after holding it for more than a year at its highest level in two decades. It was the Fed’s first rate cut in more than four years.

“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%,” Fed Chair Jerome Powell said in a press conference following the announcement.

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Powell cautioned against assuming the half-point move sets a pace that policymakers would continue.

“I do not think that anyone should look at this and say, ‘Oh, this is the new pace,'” Powell said.

Until recently, officials put an emphasis on their quest to stifle inflation. In their statement Wednesday, policymakers indicated they now see the risks to employment and inflation as “roughly balanced.” The committee is “strongly committed to supporting maximum employment” in addition to bringing inflation back to its goal, officials said.

The S&P 500 index swung between gains and losses after hitting an all-time high in the immediate aftermath of the Fed decision. Treasury two-year yields remained slightly lower than before the announcement. Investors are betting on an additional 75 basis points of cuts by year end, according to futures.

Policymakers penciled in an additional percentage point of cuts in 2025, according to their median forecast.

Governor Michelle Bowman dissented in favor of a smaller, quarter-point cut — the first dissent by a governor since 2005 and the first dissent from any member of the FOMC since 2022.

In an interview with Bloomberg Television, KPMG Chief Economist Diane Swonk said Powell’s willingness to cut aggressively despite a governor’s dissent was a sign of “how much he wanted this half-percent rate cut.” And getting the rest of the committee to go along, she added, was a “huge victory.”

In their statement, policymakers said they will consider “additional adjustments” to rates based on “incoming data, the evolving outlook and the balance of risks.”

They also noted that inflation “remains somewhat elevated” and job gains have slowed.

Officials updated quarterly economic forecasts, raising their median projection for unemployment at the end of 2024 to 4.4% from 4% forecast in June. That would represent a small deterioration from the current level of 4.2%. Powell said last month that further cooling in the labor market would be “unwelcome.”

The median forecast for inflation at the end of 2024 declined to 2.3%, while the median projection for economic growth ticked down to 2%. Policymakers still don’t see inflation returning to their 2% target until 2026.

Officials again raised their projection for the long-run federal funds rate to 2.9% from 2.8%. Powell added that he believes interest rates are unlikely to return to the ultra-low levels seen for many years before the pandemic.

New chapter

Wednesday’s decision begins a new chapter for the Fed, which started lifting borrowing costs in early 2022 to curb a pandemic-driven surge in prices. Inflation, fanned by supply-chain disruptions and a wave of demand from locked-down consumers, ultimately climbed to its highest level since 1981.

The central bank raised rates 11 times, bringing its benchmark to a two-decade high in July 2023.

Since then, inflation has cooled considerably and — at 2.5% — is nearing the Fed’s 2% target. And while the labor market has weakened, there’s no clear indication the US economy is in recession or on the cusp of falling into one. Layoffs remain low, consumers are still spending and economic growth is strong.

“The updated dot plot suggests a gradual path of rate cuts going forward, suggesting the Fed sees the 50-basis-point move as a preemptive one that will be enough to stabilize the labor market. The median participant still sees real GDP growing at a solid pace of 2% this year,” said Anna Wong, Stuart Paul, Eliza Winger and Chris Collins, economists with Bloomberg Economics.

Still, there are growing signs of strain. Excess savings that helped support Americans in recent years have run dry, and delinquency rates are rising. An increase in job losses could trigger a pullback in spending and slow the economy.

The muddied economic picture has increased uncertainty and spurred divisions among Fed officials over the best path forward for policy. Some are anxious to curb labor-market weakness before it spirals into more pain. Others worry that cutting rates too quickly may reignite demand and keep inflation elevated.

The Fed said it will maintain the pace at which it’s reducing bond holdings every month, letting excess liquidity continue to drain from the financial system.

Powell also made clear he believes the Fed can reduce the balance sheet — a process known as quantitative tightening — and lower rates at the same time.

“We’re not thinking about stopping runoff because of this,” he said. “We know that these two things can happen side by side, in the sense they’re both a form of normalization.”

The central bank has been winding down its holdings since June 2022.