The Federal Reserve made its first rate cut in three years, lowering interest rates by 50 basis points on Wednesday. The move is part of a broader strategy to support the economy as inflation pressures subside after a prolonged period of aggressive rate hikes.

The Federal Open Market Committee (FOMC) reduced its benchmark rate to a range of 4.75% to 5%. The decision, however, was not unanimous. Federal Reserve Governor Michelle Bowman dissented, advocating for a more modest 25 basis-point cut.

Fed officials signaled further rate cuts are on the horizon. The central bank now anticipates the benchmark rate will fall to 4.4% by the end of 2024, which would involve two additional 25 basis-point reductions. This is an adjustment from earlier projections in June, which had anticipated just one cut next year. By 2025, the rate is expected to decline further to 3.4%, down from the previous estimate of 4.1%, and eventually settle at 2.9% in 2026.

This rate cut marks the end of a lengthy period of tight monetary policy aimed at taming the surge in inflation that followed the pandemic. In recent years, the Fed had raised interest rates to as high as 5.25%, the highest level since 2001, in an effort to slow economic growth and combat inflation.

Recent data shows the core Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, has cooled significantly. The index rose 2.6% over the 12 months ending in July, down from its peak of 5.4% in March 2022.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent and believes the risks to achieving its goals for inflation and employment are now more balanced,” the Fed said in its policy statement.

With inflation under control, the Fed has shifted focus to maintaining maximum employment. Policymakers are making it clear that they are not willing to tolerate further weakening in the labor market.

Fed forecasts now suggest inflation will slow faster than previously expected. Core PCE inflation is projected to be 2.6% in 2024, down from a June forecast of 2.8%. By 2025, inflation is expected to decrease to 2.2%, with further easing to the Fed’s 2% target by 2026.

Despite progress on inflation, some experts question how aggressively the Fed will continue cutting rates. "The new forecasts don’t show inflation reaching the 2% target until 2026, raising doubts about the pace of future cuts," analysts at Vital Knowledge noted. They added that the terminal rate forecast is now approaching 3%, signaling a more hawkish stance.

In the run-up to the Fed’s September meeting, some market participants had called for an even larger 50 basis-point cut, citing concerns about potential economic weakness as the labor market shows signs of cooling.

Former New York Federal Reserve President Bill Dudley was among those advocating for a steeper cut, arguing that interest rates remain 150 to 200 basis points above the so-called neutral rate, which neither stimulates nor restricts economic activity.

The Fed has revised its estimate of the neutral rate, raising it to 2.9% from a previous projection of 2.8%.

Fed officials also predict a slight rise in unemployment in the coming years. The central bank now forecasts the unemployment rate will reach 4.4% in 2024, up from a prior estimate of 4%. The rate is expected to remain at 4.4% through 2025, before edging down slightly to 4.3% in 2026.

Despite the projected uptick in unemployment, the Fed does not expect it to significantly impact economic growth. Gross domestic product (GDP) is forecast to grow by 2% in 2024, only slightly lower than the June estimate of 2.1%, and maintain this pace through 2027.

During the post-decision press conference, Fed Chairman Jerome Powell downplayed recession risks, highlighting strong growth, moderating inflation, and a robust labor market.

“I don’t see anything in the economy right now that suggests the likelihood of a downturn is elevated,” Powell said. “Growth is solid, inflation is coming down, and the labor market remains strong, so I don’t view a recession as likely at this point.”

Following the Fed’s decision, markets experienced some volatility, ending the day slightly below break-even.

While the rate cut was widely anticipated, it may prompt a "quick and modest pullback" in markets, according to a note from Vital Knowledge. However, macroeconomic factors such as disinflation, steady growth, monetary easing, and strong corporate performance "remain supportive of higher prices," the firm added.