The US Federal Reserve cut the target range for the federal funds rate by half a percentage point to 4.75% to 5% on 18 September 2024. In its policy statement, the Federal Open Market Committee (FOMC) said it had gained greater confidence that inflation is moving sustainably towards 2% and judged that the risks to its employment and inflation goals are roughly in balance.
Corporate INTL Newsroom · Banking & Finance
Why the Fed Rate Cut of Half a Point Matters for Borrowers and Markets
By The Corporate INTL Newsroom · 19 September 2024
Eleven members voted for the move. Governor Michelle W. Bowman voted against, preferring a cut of a quarter of a percentage point.
What the Fed said about the economy
The Committee said economic activity has continued to expand at a solid pace, job gains have slowed and the unemployment rate has moved up but remains low, while inflation has made further progress but remains somewhat elevated. In considering further adjustments, it will carefully assess incoming data, the evolving outlook and the balance of risks. It will also continue reducing its holdings of Treasury securities, agency debt and agency mortgage-backed securities.
According to the Implementation Note, the interest rate paid on reserve balances falls to 4.9% from 19 September 2024, and the minimum bid rate for standing overnight repurchase agreement operations is set at 5%.
The projections
The Summary of Economic Projections shows a median federal funds rate of 4.4% at the end of 2024, 3.4% at the end of 2025 and 2.9% at the end of 2026, compared with medians of 5.1%, 4.1% and 3.1% in June. Median projections put PCE inflation at 2.3% in 2024 and 2.1% in 2025, and the unemployment rate at 4.4% at the end of 2024.
What it means for borrowers and markets
The size of the Fed rate cut, comes with the Committee's statement that it is strongly committed to supporting maximum employment and returning inflation to its 2% objective. Lower short-term rates reduce costs on floating rate corporate loans and leveraged finance tied to benchmark rates, and may support refinancing and deal activity. For banks, falling rates can compress deposit margins. Outside the United States, central banks and borrowers with dollar funding will watch whether the projected path for 2025 is delivered, as it affects exchange rates and the cost of cross-border borrowing.
Sources
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