Federal Reserve is set to reduce U.S. short-term borrowing costs on Wednesday, marking a significant shift after more than two years of battling high inflation. The central bank is expected to lower its key rate by either a quarter-point to 5.00%-5.25% or a half-point to 4.75%-5.00%, following a series of hikes that totaled 5.25 percentage points since March 2022.
While the initial cut could be modest, the Fed is likely to continue lowering rates, aiming for a range between 4% and 4.5% by the end of the year, with more reductions planned for 2025. However, policymakers have indicated that rates will not return to the sub-2% levels seen prior to 2022, meaning the low mortgage rates of the past are unlikely to come back soon.
Despite these cuts, inflation has cooled significantly, and average paychecks are now rising faster than prices. However, the high cost of goods, like groceries, continues to strain household budgets.
The Fed’s aggressive rate hikes were initially expected to trigger a recession, but the economy has so far avoided that outcome. Inflation, measured by the Consumer Price Index, has dropped to 2.5% from a mid-2022 high of over 9%, while unemployment remains low at 4.2%.
The central bank’s goal is to lower rates without disrupting the labor market further, aiming for what economists call a «soft landing.» This would allow the economy to cool without leading to mass job losses, but history shows such outcomes are rare.
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