Federal Reserve signals end to inflation fight with a sizable half-point rate cut

WASHINGTON (AP) — The Federal Reserve on Wednesday cut its benchmark interest rate by an unusually large half-point, a dramatic shift after more than two years of high rates that helped tame inflation but also made borrowing painfully expensive for American consumers.

The rate cut, the Fed’s first in more than four years, reflects its new focus on bolstering the job market, which has shown clear signs of slowing. Coming just weeks before the presidential election, the Fed’s move also has the potential to scramble the economic landscape just as Americans prepare to vote.

The central bank’s action lowered its key rate to roughly 4.8%, down from a two-decade high of 5.3%, where it had stood for 14 months as it struggled to curb the worst inflation streak in four decades. Inflation has tumbled from a peak of 9.1% in mid-2022 to a three-year low of 2.5% in August, not far above the Fed’s 2% target.

The Fed’s policymakers also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. And they envision four more rate cuts in 2025 and two in 2026.

In a statement and in a news conference with Chair Jerome Powell, the Fed came closer than it has before to declaring victory over inflation.

“We know it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation,” Powell said. "We’re not saying, ‘mission accomplished’ ... but I have to say, though, we’re encouraged by the progress that we have made.”

“The U.S. economy is in a good place," he added, "and our decision today is designed to keep it there.”

Though the central bank now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers even further.

Rate cuts by the Fed should, over time, lead to lower borrowing costs for mortgages, auto loans and credit cards, boosting Americans’ finances and supporting more spending and growth. Homeowners will be able to refinance mortgages at lower rates, saving on monthly payments, and even shift credit card debt to lower-cost personal loans or home equity lines. Businesses may also borrow and invest more. Average mortgage rates have already dropped to an 18-month low of 6.2%, according to Freddie Mac, spurring a jump in demand for refinancings.

“It’s a step in the right direction,” Laura Rosner-Warburton, senior economist of MacroPolicy Perspectives, said of Wednesday's Fed move.

The additional rate cuts it indicated it will make, she said, will “prevent risks from building and the unemployment rate from rising. They are trying to keep the economy in good shape.”

In an updated set of projections, the policymakers collectively envision a faster drop in inflation than they did three months ago but also higher unemployment. They foresee their preferred inflation gauge falling to 2.3% by year’s end, from its current 2.5%, and to 2.1% by the end of 2025. And they now expect the unemployment rate to rise further this year, to 4.4%, from 4.2% now, and to remain there by the end of 2025. That’s above their previous forecasts of 4% for the end of this year and 4.2% for 2025.

Powell was pressed at his news conference about whether the Fed’s decision to cut its key rate by an unusually large half-point is an acknowledgement that it waited too long to begin reducing borrowing rates.

“We don’t think we’re behind,” he replied. “We think this is timely. But I think you can take this as a sign of our commitment not to get behind. We’re not seeing rising (unemployment) claims, not seeing rising layoffs, not hearing from companies that that’s something that’s going to happen.”

He added: “There is thinking that the time to support the labor market is when it’s strong and not when you begin to see the layoffs. We don’t think we need to see further loosening in labor market conditions to get inflation down to 2%.”

The Fed’s next policy meeting is Nov. 6-7 — immediately after the presidential election. By cutting rates this week, soon before the election, the Fed is risking attacks from Trump, who has argued that lowering rates now amounts to political interference. Yet Politico has reported that even some key Senate Republicans who were interviewed expressed support for a Fed rate cut this week.

Powell pushed back against any suggestion that the Fed shouldn't cut rates so close to an election.

“We’re not serving any politician, any political figure, any cause, any issue,” he said. "It’s just maximum employment and price stability on behalf of all Americans. And that’s how the other central banks are set up, too. It’s a good institutional arrangement, which has been good for the public, and I hope and strongly believe that it will continue.”

Powell’s characterization of the economy as fundamentally healthy, with inflation under control and employment stable but likely to benefit from rate cuts was an unspoken rebuttal to Trump’s warnings that an economic disaster is near.

The Fed's move Wednesday reverses the inflation-fighting effort it engineered by raising its key rate 11 times in 2022 and 2023. Wage growth has since slowed, removing a potential source of inflationary pressure. And oil and gas prices are falling, a sign that inflation should continue to cool in the months ahead. Consumers are also pushing back against high prices, forcing such companies as Target and McDonald’s to dangle deals and discounts.

The Fed’s decision drew the first dissent from a member of its governing board since 2005. Michelle Bowman, a board member who has expressed concern in the past that inflation had not been fully defeated, said she would have preferred a quarter-point rate cut.

But the Fed's policymakers as a whole appear to recognize that after years of strong job growth, employers have slowed hiring, and the unemployment rate has risen nearly a full percentage point from its half-century low in April 2023 to a still-low 4.2%. Once unemployment rises that much, it tends to keep climbing.

At the same time, the officials and many economists have noted that the rise in unemployment this time largely reflects an influx of people seeking jobs — notably new immigrants and recent college graduates — rather than layoffs.

The Fed’s attention now is “preserving the health of the labor market and preventing unnecessary damage to the economy from a pretty restrictive (interest rate) stance,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

AP Writers Alex Veiga in Los Angeles, Paul Wiseman and Josh Boak in Washington and Stan Choe in New York contributed to this report.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2024. (AP Photo/Ben Curtis)

FILE - The seal of The Federal Reserve System is seen during a news conference by Federal Reserve Board Chairman Jerome Powell at the Federal Reserve Board Building on July 31, 2024, in Washington. (AP Photo/Jose Luis Magana, File)

FILE - Federal Reserve Chair Jerome Powell walks outside of the Jackson Hole Economic Symposium at Jackson Lake Lodge in Grand Teton National Park near Moran, Wyo., on Aug. 23, 2024. (AP Photo Amber Baesler, File)

FILE - The Federal Reserve is in Washington is shown on Nov. 16, 2020. (AP Photo/J. Scott Applewhite, File)

FILE - A detail of the Federal Reserve building in Washington is shown on Nov. 16, 2020. (AP Photo/J. Scott Applewhite, File)

WASHINGTON (AP) — Facing a government shutdown deadline, the Senate rushed through final passage early Saturday of a bipartisan plan that would temporarily fund federal operations and disaster aid, dropping President-elect Donald Trump's demands for a debt limit increase into the new year.

House Speaker Mike Johnson had insisted Congress would “meet our obligations” and not allow federal operations to shutter ahead of the Christmas holiday season. But the day's outcome was uncertain after Trump doubled down on his insistence that a debt ceiling increase be included in any deal — if not, he said in an early morning post, let the closures “start now.”

The House approved Johnson's new bill overwhelmingly, 366-34. The Senate worked into the night to pass it, 85-11, just after the deadline. At midnight, the White House said it had ceased shutdown preparations.

“This is a good outcome for the country, ” Johnson said after the House vote, adding he had spoken with Trump and the president-elect “was certainly happy about this outcome, as well.”

President Joe Biden, who has played a less public role in the process throughout a turbulent week, was expected to sign the measure into law Saturday.

“There will be no government shutdown," Senate Majority Leader Chuck Schumer said.

The final product was the third attempt from Johnson, the beleaguered House speaker, to achieve one of the basic requirements of the federal government — keeping it open. And it raised stark questions about whether Johnson will be able to keep his job, in the face of angry GOP colleagues, and work alongside Trump and billionaire ally Elon Musk, who called the legislative plays from afar.

Trump's last-minute demand was almost an impossible ask, and Johnson had almost no choice but to work around his pressure for a debt ceiling increase. The speaker knew there wouldn’t be enough support within the GOP majority to pass any funding package, since many Republican deficit hawks prefer to slash the federal government and certainly wouldn’t allow more debt.

Instead, the Republicans, who will have full control of the White House, House and Senate next year, with big plans for tax cuts and other priorities, are showing they must routinely rely on Democrats for the votes needed to keep up with the routine operations of governing.

“So is this a Republican bill or a Democrat bill?” scoffed Musk on social media ahead of the vote.

The drastically slimmed-down 118-page package would fund the government at current levels through March 14 and add $100 billion in disaster aid and $10 billion in agricultural assistance to farmers.

Gone is Trump’s demand to lift the debt ceiling, which GOP leaders told lawmakers would be debated as part of their tax and border packages in the new year. Republicans made a so-called handshake agreement to raise the debt limit at that time while also cutting $2.5 trillion in spending over 10 years.

It’s essentially the same deal that flopped the night before in a spectacular setback — opposed by most Democrats and some of the most conservative Republicans — minus Trump’s debt ceiling demand.

But it's far smaller than the original bipartisan accord Johnson struck with Democratic and Republican leaders — a 1,500-page bill that Trump and Musk rejected, forcing him to start over. It was stuffed with a long list of other bills — including much-derided pay raises for lawmakers — but also other measures with broad bipartisan support that now have a tougher path to becoming law.

House Democrats were cool to the latest effort after Johnson reneged on the hard-fought bipartisan compromise.

Rep. Rosa DeLauro, the top Democrat on the Appropriations Committee, said it looked like Musk, the wealthiest man in the world, was calling the shots for Trump and Republicans.

“Who is in charge?” she asked during the debate.

Still, the House Democrats put up more votes than Republicans for the bill's passage. Almost three dozen conservative House Republicans voted against it.

“The House Democrats have successfully stopped extreme MAGA Republicans from shutting down the government, crashing the economy and hurting working-class Americans all across the nation,” House Democratic Leader Hakeem Jeffries said, referring to Trump's “Make America Great Again” slogan.

In the Senate, almost all the opposition came from the Republicans — except independent Sen. Bernie Sanders, who said Musk's interference was “not democracy, that's oligarchy.”

Trump, who has not yet been sworn into office, is showing the power but also the limits of his sway with Congress, as he intervenes and orchestrates affairs from Mar-a-Lago alongside Musk, who is heading up the new Department of Government Efficiency.

The incoming Trump administration vows to slash the federal budget and fire thousands of employees and is counting on Republicans for a big tax package. And Trump's not fearful of shutdowns the way lawmakers are, having sparked the longest government shutdown in history in his first term at the White House.

“If there is going to be a shutdown of government, let it begin now,” Trump posted early in the morning on social media.

More important for the president-elect was his demand for pushing the thorny debt ceiling debate off the table before he returns to the White House. The federal debt limit expires Jan. 1, and Trump doesn't want the first months of his new administration saddled with tough negotiations in Congress to lift the nation's borrowing capacity. Now Johnson will be on the hook to deliver.

“Congress must get rid of, or extend out to, perhaps, 2029, the ridiculous Debt Ceiling,” Trump posted — increasing his demand for a new five-year debt limit increase. "Without this, we should never make a deal."

Government workers had already been told to prepare for a federal shutdown that would send millions of employees — and members of the military — into the holiday season without paychecks.

Biden has been in discussions with Jeffries and Schumer, but White House press secretary Karine Jean-Pierre said: “Republicans blew up this deal. They did, and they need to fix this.”

As the day dragged on, Senate Republican Leader Mitch McConnell stepped in to remind colleagues “how harmful it is to shut the government down, and how foolish it is to bet your own side won’t take the blame for it.”

At one point, Johnson asked House Republicans at a lunchtime meeting for a show of hands as they tried to choose the path forward.

It wasn’t just the shutdown, but the speaker’s job on the line. The speaker’s election is the first vote of the new Congress, which convenes Jan. 3, and some Trump allies have floated Musk for speaker.

Johnson said he spoke to Musk ahead of the vote Friday and they talked about the “extraordinary challenges of this job.”

Associated Press writers Kevin Freking, Stephen Groves, Mary Clare Jalonick, Darlene Superville and Bill Barrow contributed to this report.

Senate Majority Leader Chuck Schumer, D-N.Y., celebrates as the Senate begins voting on the government funding bill just in time to meet the midnight deadline, at the Capitol in Washington, Friday, Dec. 20, 2024. (AP Photo/J. Scott Applewhite)

Senate Majority Leader Chuck Schumer, D-N.Y., celebrates as the Senate begins voting on the government funding bill just in time to meet the midnight deadline, at the Capitol in Washington, Friday, Dec. 20, 2024. (AP Photo/J. Scott Applewhite)

Speaker of the House Mike Johnson, R-La., talks to reporters after passing the funding bill to avert the government shutdown at the Capitol in Washington, Friday, Dec. 20, 2024. (AP Photo/Jose Luis Magana)

Speaker of the House Mike Johnson, R-La., talks to reporters after passing the funding bill to avert the government shutdown at the Capitol in Washington, Friday, Dec. 20, 2024. (AP Photo/Jose Luis Magana)

The Capitol is pictured in Washington, Friday, Dec. 20, 2024. (AP Photo/J. Scott Applewhite)

Speaker of the House Mike Johnson, R-La., emerges from a closed-door meeting with fellow Republicans at the Capitol in Washington, Friday, Dec. 20, 2024. (AP Photo/J. Scott Applewhite)

Speaker of the House Mike Johnson, R-La., emerges from a closed-door meeting with fellow Republicans at the Capitol in Washington, Friday, Dec. 20, 2024. (AP Photo/J. Scott Applewhite)

Rep. Dusty Johnson, R-S.D., talks with reporters after attending a meeting with Speaker of the House Mike Johnson, R-La., as the House works on a spending bill to avert a shutdown of the Federal Government, Friday, Dec. 20, 2024, at the Capitol in Washington. (AP Photo/John McDonnell)

FILE - President-elect Donald Trump poses for a photo with Dana White, Kid Rock and Elon Musk at UFC 309 at Madison Square Garden, Nov. 16, 2024, in New York. (AP Photo/Evan Vucci, File)

Speaker of the House Mike Johnson, R-La., talks briefly to reporters just before a vote on an interim spending bill to prevent a government shutdown, at the Capitol in Washington, Thursday, Dec. 19, 2024. The vote failed to pass. (AP Photo/J. Scott Applewhite)

President-elect Donald Trump speaks during a news conference at Mar-a-Lago, Monday, Dec. 16, 2024, in Palm Beach, Fla. (AP Photo/Evan Vucci)