The Federal Reserve announced a long-awaited rate cut on Wednesday, cutting its benchmark interest rate by 50 basis points from a 23-year high, as the central bank lowered borrowing costs following progress in the fight against inflation.

The Fed’s first rate cut since March 2020 lowers the federal funds rate to a range of 4.75% to 5%.

Since July 2023, interest rates have hovered between 5.25% and 5.50%, the highest level since 2001. The central bank monitored economic data for signs that persistent inflation was moving toward its 2% target.

Recent months have shown signs of progress toward the Fed’s goal of inflation, though the latest data showed it’s not quite there yet. Inflation slowed to 2.5% annualized in August, down from 2.9% the month before and well below this cycle’s peak of 9.1% in June 2022.

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Fed Chairman Jerome Powell announced that the central bank would cut interest rates for the first time in four years. (Photo by ROBERTO SCHMIDT/AFP via Getty Images/Getty Images)

Federal Reserve Chairman Jerome Powell It was previously indicated that the central bank did not intend to wait until inflation reached 2% before cutting interest rates.

Powell explained in July that “if you wait until inflation has come down to 2%, you’ve probably waited too long, because the tightening you’re doing, or the amount of tightening you’ve done, is still having effects that are likely to take inflation below 2%.”

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A delay in hiring staff has led to concerns about the labor market and the economy potentially entering a recession. There is speculation that the Fed could cut rates by 50 basis points.

The central bank typically chooses to cut rates by 25 basis points at the start of a rate-cutting cycle. However, larger cuts have also been made during periods of greater economic uncertainty.

The most recent decisions for larger rate cuts of 50 basis points occurred in March 2020, when the COVID-19 pandemic began, in September 2007, during the housing crisis, and in January 2001, when the dot-com bubble burst.

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The Federal Reserve previously indicated that policymakers would not wait until inflation reached 2% before cutting interest rates. (Photographer: Ting Shen/Bloomberg via Getty Images/Getty Images)

Markets had already priced in a 25 basis point rate cut ahead of the Fed’s decision on Wednesday, though traders increasingly expected the Fed to cut rates by 50 basis points in the run-up to the announcement.

According to the CME FedWatch tool, the probability of a 50 basis point rate cut rose to 64% from 25% a month ago the day before the Fed’s decision.

Wednesday’s rate cut decision is expected to be the first in a series of steps to lower rates. Before the Fed’s announcement, markets had been expecting the Fed to announce further rate cuts at its meetings in the coming months, as the CME FedWatch tool sees a slightly above 50% probability that the rate will be cut to a range of 4.5% to 4.75% in November.

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“The markets got what they wanted – a big first cut from the Fed,” said Chris Larkin, managing director of trading and investing at E*TRADE for Morgan Stanley. “Beyond how hot or cold the economy runs, that probably depends largely on what the Fed has to say about how fast and far rates will fall from here.”

The Federal Reserve’s next policy meeting will be held on November 6-7, immediately after Election Day on November 5, while the last meeting of the year will be held on December 17-18.