US Federal Reserve chairman Jerome Powell, Photo: AFP / Mandel Ngan
- US central bank kicks off easing cycle
- Fed's policy rate lowered to 4.75 percent - 5.00 percent range
- Policymakers see another 50 basis points of cuts in 2024
- One member of Fed board dissents; preferred smaller cut
The US central bank has cut interest rates by a bigger-than-expected 0.5 percentage points in its first reduction in more than four years.
The Federal Reserve's benchmark rate was cut to a range of 4.7 to 5.0 percent, after being held at a 23-year high since July 2023.
Federal Reserve chair Jerome Powell said the large cut was a "strong" move but was not in response to growing worries about the US economy and the labour market in particular.
"We don't think we are behind," he said. "We think this is timely but you can take this as a sign of our commitment not to get behind."
However, one board member, Michelle Bowman, took the unusual step of dissenting because she had wanted a smaller 25 basis points cut.
Powell said the Federal Reserve, which has a dual mandate -- anchor inflation around 2 percent, and to maximise employment -- was watching data.
"This decision reflects our growing confidence that with an appropriate recallibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent."
Projections issued by the Federal Reserve suggested two more 25 basis point cuts this year, four more cuts next year and two more cuts in 2026.
Behind the pack
The Federal Reserve has waited longer than some other central banks, including the Reserve Bank of New Zealand (RBNZ), to start cutting rates, but Powell said that its patience had paid dividends because it made them more comfortable that they inflation under control.
US share markets gained modestly after the decision, while the US dollar and interest rates fell.
That had the effect of lifting the New Zealand dollar to a three week high of 62.6 US cents before it eased back.
"The decision to opt for a bigger initial cut suggests the central bank wants policy settings to be closer to neutral," BNZ strategist Stuart Ritson said in a note.
US economist Randall Kroszner, a professor at the University of Chicago's Booth School of Business and a former governor of the Fed, said the announcement was significant not because of the size of the cut but because it will kick off a new period of lower borrowing costs.
"One quarter of a percentage point one way or another - that's not going to break the US economy," he said.
"It's really where they are headed both for the rest of the year, as well as in the intermediate and longer run."
The RBNZ's next review of the official cash rate is on 9 October, with financial markets pricing in at least a 25 basis point cut but a strong inclination towards a 50 basis points cut to 5.25 percent .