The Fed cuts key interest rate by a significant half point, signaling the end of its fight against inflation

The rate cut, the Fed’s first in more than four years, reflects the Fed’s new focus on strengthening the labor market, which has shown clear signs of slowing.

The Fed’s move, coming just weeks before the presidential election, could dramatically alter the economic landscape just as Americans prepare to vote.

The central bank’s action cut its key interest rate to around 4.8 percent, down from a two-decade high of 5.3 percent, where it had stood for 14 months as it struggled to rein in the worst wave of inflation in four decades. Inflation has fallen from a peak of 9.1 percent in mid-2022 to a three-year low of 2.5 percent in August, not far above the Fed’s 2 percent target.

Fed policymakers also signaled they expect to cut their key interest rate by an additional half point at their last two meetings this year, in November and December. And they anticipate four more rate cuts in 2025 and two more in 2026.

In a statement, the Fed came closer than ever to declaring victory over inflation, saying it has “gained more confidence that inflation is moving toward 2 percent on a sustained basis.”

While the central bank is now confident that inflation is largely under control, many Americans are still angry about the still-high prices for groceries, gasoline, rent and other necessities.

Former President Donald Trump has blamed the Biden-Harris administration for creating a wave of inflation. Vice President Kamala Harris, for her part, has claimed that Trump’s promise to impose tariffs on all imports would further increase prices for consumers.

The Fed’s rate cuts should eventually lower borrowing costs on mortgages, auto loans and credit cards, boosting Americans’ finances and supporting more spending and growth. Homeowners can refinance mortgages to lower rates, save on monthly payments and even shift credit card debt to cheaper personal loans or home equity lines. Businesses can also borrow and invest more.

According to Freddie Mac, average mortgage rates have already fallen to 6.2 percent, an 18-month low, fueling demand for refinancing.

The Fed’s next policy meeting is Nov. 6-7 — right after the presidential election. By cutting rates this week, right before the election, the Fed risks attack from Trump, who has argued that cutting rates now amounts to political interference.

However, Politico reports that even some key Republican senators interviewed expressed support for a Fed rate cut this week.

Central bank officials have fought high inflation by raising their key interest rate 11 times in 2022 and 2023. Wage growth has slowed since then, removing a potential source of inflationary pressure. And oil and gas prices are falling, a sign that inflation will cool further in the months ahead. Consumers are also resisting high prices, forcing companies like Target and McDonald’s to offer deals and discounts.

But after several years of strong job growth, employers have slowed hiring and the unemployment rate has risen from a half-century low to a still-low 4.2 percent in April 2023. Once unemployment gets this high, it tends to keep rising. Fed officials and many economists note, however, that the rise in unemployment this time largely reflects an influx of people looking for jobs — particularly new immigrants and recent college graduates — rather than layoffs.

The question the Fed wants to answer is how quickly it wants to cut its key interest rate to a point where it is no longer a drag on the economy, but no longer an accelerator either.

It is not clear where that so-called ‘neutral’ level will end up, although many analysts estimate it at 3 to 3.5 percent.