The Federal Reserve cut interest rates on Wednesday by a half percentage point, an unusually large move that signals central bankers think they are winning their war against inflation and are now turning attention to keeping the job market from weakening further.
“Our patient approach over the past year has paid dividends,” Jerome H. Powell, the Fed chair, said during his news conference. But now “the upside risks to inflation have diminished, and the downside risks to unemployment have increased.”
The Fed’s decision lowers rates to about 4.9 percent, down from a more than two-decade high.
The move comes in response to months of fading inflation, and it is meant to prevent the economy from slowing so much that the job market begins to crack. Officials have been keeping a careful eye on a recent rise in the unemployment rate, and by starting off with a big cut, the Fed is effectively taking out insurance against a bigger employment slowdown.
Reinforcing that cautious message, the move came alongside economic projections that suggested a more rapid pace of rate cuts than central bankers had previously predicted: Officials now expect to make another half point of reductions before the end of the year.
“We’re going to take it meeting by meeting,” Mr. Powell said. “We made a good, strong start to this, and that is frankly a sign of our confidence, inflation is coming down.”
High interest rates slow the economy by making it more expensive to borrow to buy a house or expand a business, which weighs on both demand and inflation — but also on hiring. The Fed has been trying to strike a careful balance. Officials have aimed to cool growth enough to ensure that price increases return to normal without cooling it so much that the unemployment rate soars and the economy tips into a recession.
Wednesday’s pivot to rate cuts marks a preliminary victory. So far, Fed officials have managed to slow inflation notably without causing major economic problems. The unemployment rate has crept up, but it hasn’t jumped painfully. Hiring persists, though it has slowed. Consumer spending remains strong. Overall growth is still robust.
The resilience has made Fed officials hope that they might be able to pull off a historically rare “soft landing,” in which they manage to put the economy on a healthy and sustainable track without causing a recession.
But the central bank’s task is not yet complete.
Policymakers must still decide how much and how quickly to lower interest rates in the coming months and years. That’s why Wednesday’s economic projections are noteworthy: They provide a snapshot of what Fed officials expect to do next.
Fed officials predicted that they would cut interest rates to 4.4 percent by the end of the year — much lower than the 5.1 percent they had been expecting in June, when they last released economic estimates. And by the end of 2025, they expect to lower borrowing costs another full percentage point, to 3.4 percent.
“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes,” Mr. Powell said. While he described today’s unemployment rate as healthy and wage growth relatively robust by historical standards, he also suggested that the Fed’s reorientation should help to prevent a more serious slowdown.
“There is thinking that the time to support the labor market is when it’s strong, and not when you begin to see layoffs,” he said at another point.
One official dissented against Wednesday’s move, Fed governor Michelle Bowman. She would have preferred a smaller rate cut.
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