Fed cuts interest rate by 0.5% - The first drop in four years
This is the first time the US central bank has cut the interest rate since March 2020
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Amercia's Federal Reserve has reduced its interest rate by 0.5 per cent.
Financial markets had predicted the US central bank would impose a bigger than expected interest rate cut this week, with the Bank of England holding off on a fresh reduction.
The Federal Reserve said it would lower the target for its key lending rate by 0.5 percentage points, to the range of 4.75 per cent to five per cent.
In their FOMC statement it said: “The Committee has gained greater confidence that inflation is moving sustainably toward two percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance… the economic outlook is uncertain”
The Federal Reserves had been holding interest rates at its 5.25 per cent to 5.5 per cent target range since July last year.
Economists expected a rate cut at today's meeting, however they were split between predicting a 0.25 percentage point cut versus a 0.5 percentage point reduction, according to financial data firm FactSet.
The Fed Chair Jerome Powell has suggested rate cuts are on their wayGETTYRandall Kroszner, economist and a former governor of the Fed, said Wednesday's announcement was significant not because of the size of the cut but because it will kick off a new period of lower borrowing costs.
He said: "One quarter of a percentage point one way or another - that's not going to break the US economy.
"It's really where they are headed both for the rest of the year, as well as in the intermediate and longer run."
The Fed's first rate reduction since March 2020 will provide some welcome relief for home owners and home buyers as well as for those carrying pricey credit card debt.
The decision could kick off a series of rate reductions later this year and into 2025, which could have lasting implications on mortgage and auto loan rates.
Savers could also sadly see interest rate cuts to the high interest they have been seeing across their savings accounts.
Forecasts released by the Fed showed officials expect its key lending rate to drop to about 4.4 per cent by the end of the year and 3.4 per cent by the end of 2025.
Central banks have been under pressure to act, as interest rates have reached multi-decade highs in efforts to combat inflation.
The recent weakening in the US economy, which has sparked fears of a recession, meant financial market opinion were split on whether a quarter point cut or half point reduction was coming.
Jay Powell, chair of the Federal Reserve, signalled a shift in policy at last month's central bankers' gathering in Jackson Hole, stating: "The time has come for policy to adjust."
Although the Fed reduced their rates to prevent a slowdown from becoming a recession, the Bank of England is expected to remain cautious.
Governor Andrew Bailey and his colleagues are likely to wait for more evidence of economic struggle before implementing further cuts.
New inflation data released today is also tipped to show a quickening in the pace of so-called core inflation - a measure that strips out volatile elements such as food and energy prices.
A Reuters poll of economists sees the headline rate of consumer prices inflation for the year to August coming in at 2.2 per cent.