Questions: Society & Politics

The Federal Reserve slashed rates on Wednesday for the first time since early 2020, the clearest signal yet that central bankers believe they are winning their years long battle against rapid inflation.

Fed officials slashed borrowing costs by half a percentage point, an unusually large reduction. The decision lowers rates to about 4.9 percent, down from a more than two-decade high.

The Fed’s 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 cautious 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 wary message, the move came alongside economic projections that suggested a more aggressive 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.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” Fed officials said in their statement.

High interest rates slow the economy by making it more expensive to borrow to buy a house or expand 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 rate cut 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.