WASHINGTON — The Federal Reserve on Wednesday delivered its first interest rate cut since the early days of the Covid pandemic, cutting rates by half a percentage point in an effort to stave off a slowdown in the labor market.

With both employment and inflation falling, the central bank’s Federal Open Market Committee decided to cut its key overnight lending rate by half a percentage point, or 50 basis points, confirming market expectations that had previously shifted to a cut of half.

Aside from the emergency rate cuts during Covid-19, the last time the FOMC cut rates by half a point was in 2008, during the global financial crisis.

The decision lowers the federal funds rate to a range of 4.75%-5%. While the rate sets short-term borrowing costs for banks, it feeds into multiple consumer products such as mortgages, auto loans and credit cards.

In addition to the cut, the committee indicated via its “dot plot” the equivalent of an additional 50 basis points of cuts by the end of the year, close to market prices. The matrix of individual officials’ expectations pointed to another full percentage point of cuts by the end of 2025 and a half point in 2026. In total, the dot plot shows the benchmark rate will be about 2 percentage points lower than Wednesday’s move.

“The Committee has gained more confidence that inflation is moving towards 2 percent in a sustained manner and considers that the risks to the achievement of the employment and inflation objectives are broadly balanced,” the statement said after the meeting.

The decision to ease came “in light of progress on inflation and the balance of risks.” The FOMC vote came 11-1, with Governor Michelle Bowman favoring a quarter-point move. Investors will be eager to hear more from Chairman Jerome Powell in his press conference at 2:30 p.m. ET.

In assessing the state of the economy, the committee found that “employment has slowed and the unemployment rate has risen, but is still low.” FOMC officials raised their expected unemployment rate this year to 4.4%, from the 4% projection in the last update in June, and lowered the inflation outlook to 2.3% from 2.6% previously. As for core inflation, the committee lowered its projection to 2.6%, a 0.2 percentage point reduction from June.

The committee expects the neutral rate to be around 2.9% in the long term, a value that has risen as the Fed struggles to bring inflation down to 2%.

The decision comes despite most economic indicators looking fairly good.

Gross domestic product has been rising steadily, with the Atlanta Fed expecting 3% growth in the third quarter based on continued strength in consumer spending. Moreover, the Fed has chosen to cut even though most indicators show inflation is well above the central bank’s 2% target. The Fed’s preferred gauge shows inflation running around 2.5%, well below its peak but still higher than policymakers would like.

Powell and other policymakers have expressed concern about the labor market in recent days, however. While layoffs show little sign of recovery, hiring has slowed significantly. In fact, the last time the monthly hiring rate was this low — 3.5% as a share of the labor force — the unemployment rate was above 6%.

At his press conference after the July meeting, Powell noted that a 50 basis point rate cut is “not something we’re thinking about right now.”

The move helps to put an end, at least for now, to the heated debate over the extent to which the Fed should have acted in its initial move.

But it sets the tone for future questions about how far the central bank should go before it stops cutting. There was wide variation among members on where they see interest rates headed in the coming years.

Investor conviction in the move wavered in the days leading up to the meeting. Over the past week, the odds had shifted toward a half-point cut, to 63% for 50 basis points just before the decision, according to CME Group’s FedWatch gauge.

The Fed last cut rates on March 16, 2020, as part of an emergency response to an economic shutdown caused by the spread of Covid-19. The Fed began hiking in March 2022 as inflation surged to its highest level in more than 40 years, and last raised rates in July 2023. During its hiking campaign, the Fed has raised rates by 75 basis points four times in a row.

The current unemployment rate is 4.2%. This rate has increased over the past year, but is still at a level that can be considered full employment.

With the Fed at the center of the global financial universe, Wednesday’s decision is likely to resonate with other central banks, several of which have already begun to cut spending. The factors that drove up global inflation were largely pandemic-related: crippled international supply chains, excessive demand for goods over services and an unprecedented influx of monetary and fiscal stimulus.

The Bank of England, the European Central Bank and the central bank of Canada have all recently cut rates, though others waited for the Fed’s signal.

While the Fed approved the rate hike, it left in place a program of slowly reducing the size of its bond holdings. The process, dubbed “quantitative tightening,” has shrunk the Fed’s balance sheet to $7.2 trillion, a reduction of about $1.7 trillion from its peak. The Fed is allowing up to $50 billion a month in maturing Treasuries and mortgage-backed securities to be wound down, down from the original $95 billion when QT began.