The US Federal Reserve on Wednesday announced a 0.50 percentage point cut in the benchmark interest rate, the first cut in four years, and is also intended to ease borrowing costs as inflation-stricken consumers struggle with high interest rates on everything from mortgages to credit cards.

The Fed announced that the reduction will bring the key interest rate down to a range of 4.75 to 5 percent. Previously, it was between 5.25 and 5.5 percent, the highest level in 23 years.

The half-percentage point rate cut signals that the Fed is moving aggressively to prevent a flattening of the U.S. economy, as most rate cuts historically are 0.25 percentage points. Before the decision, some economists had urged the Fed to make a more significant cut, citing signs of weakness in the labor market and a slowing economy.

“This is a bit of a surprise,” said Brian Coulton, chief economist at Fitch Ratings, in an email. The half-percentage point cut “indicates an abrupt return of focus to the maximum employment mandate and a very significant improvement in confidence in the inflation path over the past month and a half.”

“The latter is a little hard to understand in light of the upcoming inflation data and suggests that the Fed may be more concerned than most about the state of the labor market, where the pace of new job creation still appears pretty solid,” he added.

Inflation is almost at its target

At a press conference on the rate cut, Fed Chairman Jerome Powell said the decision to ease more aggressively was partly due to the central bank’s confidence that inflation would soon reach policymakers’ target of 2 percent per year, as well as the cooling of employment.

However, Powell added that the labor market remained stable, although not as hot as it was during the pandemic, when labor shortages pushed up wages and some companies had a hard time finding new workers.

“We’re certainly not saying mission accomplished or anything like that, but we’re encouraged by the progress we’ve made in bringing down inflation,” Powell said in response to a question from CBS News’ Jo Ling Kent about whether the rate cut could be seen as a declaration of victory over high price increases.

Later in the press conference, Powell noted that he saw no warning signs pointing to an economic downturn. “I don’t see anything in the economy right now that suggests the likelihood of a downturn is elevated – we see solid growth, we see falling inflation and a labor market that is still at very solid levels,” he added.

Securing the labour market

It is the first decline in the benchmark interest rate – the rate banks charge each other for short-term loans – since the Federal Reserve cut rates to near zero in March 2020 amid a pandemic-related economic shutdown. But as prices soared during the health crisis, the Fed repeatedly raised rates to curb inflation.

The economic crisis of the past four years has left many consumers and businesses with high prices and increased borrowing costs, although Fed interest rate hikes have helped reduce inflation. 2.5% in August close to the central bank’s 2% target on an annual basis.

Recently, however, there have been some worrying signs of a slowdown in the labor market, prompting Fed Chairman Powell to say last month: “the time has come” to lower interest rates.

In its statement on Wednesday, the Fed justified its decision to make deeper cuts “with the progress made on inflation and the risk balance.”

“The Committee has become more confident that inflation is moving toward 2% on a sustainable basis and believes that the risks to achieving its employment and inflation goals are roughly balanced,” the Fed said in the statement. “The economic outlook is uncertain, and the Committee is mindful of the risks to both sides of its dual mandate.”

The sharper rate cut signals that “the Fed is supporting the labor market,” Sonu Varghese, global macro strategist at the Carson Group, said in an email.

Further interest rate cuts in 2024

Even more important than today’s rate cut is what the Fed does in the coming months as it shifts away from fighting inflation and instead stimulates the country’s economy to avert a downturn.

The Fed also released its economic forecasts for the coming years, showing that its members are setting the median benchmark interest rate for 2024 at 4.4%, which would be a cut of about 1 percentage point from the previous level, financial data firm FactSet noted.

The reduction on Wednesday is likely to ease the financial burden on some consumers, experts said.

“A rate cut in September and the possibility of another cut this year should be welcome news for investors,” Joe Gaffoglio, CEO of Mutual Of America Capital Management, said in an email before the decision. The rate cut “along with easing inflation should help ease the financial burden on low- and middle-income consumers.”

Economists also predict that Wednesday’s rate cut will be the first in a series of cuts this year and through 2025. Many analysts expect the Fed to cut its benchmark interest rate at its November and December meetings as well, according to FactSet. (The Fed has no rate meeting scheduled for October.)

Next FOMC meeting

Powell, who is scheduled to explain the Fed’s decision at a press conference at 2:30 p.m. Eastern time, had previously been criticized by some economists and policy experts for moving too slowly, both in raising interest rates first to combat inflation and in hesitating to cut rates in light of the weakening economy.

The Fed’s next meetings are scheduled for November 6 and 7, after the US presidential election, and December 17 and 18.