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Fortune
Fortune
Greg McKenna

The Fed cut interest rates on Wednesday: What you need to know

Jerome Powell had big news Wednesday afternoon, with the Federal Reserve chair announcing the first interest rate cut in over four years. The federal funds rate, also known as the base interest rate, was reduced by 50 basis points, down from a two-decade high after the Fed fought the biggest spike in inflation since the early 1980s.

Powell all but declared the battle against inflation won last month in a speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. “The time has come for policy for adjust,” he said then, amid a rise in the unemployment rate and other signs of a cooling economy.

Wall Street has been clamoring for this action for months, but the implications of this first cut and the timing of future ones remains uncertain. Here’s what you need to know:

When did the Fed make its announcement?  

The Federal Open Market Committee kicked off its two-day September meeting on Tuesday in Washington D.C. The central bank announced the 50-point cut in a release at 2 p.m. Wednesday, which Powell followed with a press conference half an hour later.

“It is time to recalibrate our policy to something that is more appropriate given the progress on inflation and unemployment moving to a more sustainable level,” he said.

What did the Fed do?

The Fed usually telegraphs changes to interest rates before policy meetings, but it left vaguer signals this time around. The committee voted 11-1 to cut rates by a half point to a range of 4.75 to 5%, with Fed governor Michelle Bowman advocating for just a quarter-point cut.

The Fed projected lowering rates another half point by the end of the year. The next cut could come at the Fed's next policy meeting on Nov. 7, just two days after the U.S. presidential election. Through 2026, the central bank expects rates to fall to 2.9%.

While the subject of fierce debate on Wall Street, the difference between a quarter- or half-point cut likely won’t be felt much by most Americans. The full effects of a rate cut take years to ripple across the economy.

The 30-year mortgage rate has been falling, however, and Powell’s commentary could cause them to drop further sooner rather than later. Eventually, the cuts will also spill over to other consumer products like auto loans and credit cards.

How did markets react?

Last month, Wall Street appeared to be anticipating a gradual approach from the Fed, but traders became increasingly optimistic about a 50-point cut in recent weeks.

Traders initially cheered the move before stocks closed slightly in the red, pointing to concerns that the Fed could be sensing economic vulnerability. The Dow Jones was down just over 100 points at close, erasing its brief 375-point gain following the Fed's decision. The S&P 500 and Nasdaq Composite both fell 0.3%.

A 25-point cut might have angered investors who believe the Fed has been acting too slowly, sparking recession fears and a market sell-off. At the same time, a 50-point cut raises questions over whether inflation will spike again or if the economy is cooling faster than the Fed anticipated.   

Powell said he doesn't believe the half-point cut elevates the risk of a potential economic downturn.

“I don’t see that,” he said. “You see growth at a solid rate. You see inflation coming down. You see a labor market that’s still at very solid levels. So, I don’t really see that now.”

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