Fed Makes Largest Rate Cut Since 2020

The U.S. Fed, after years of pressure by companies and investors, has finally cut interest rates for the first time since 2020.

Graph of interest rates since 2012, New York Times.

Ever since the U.S. economy witnessed historically high inflation rates following reopening from COVID-19 lockdowns, millions of Americans have paid the price of this "hidden tax." It has caused the prices of everyday essentials from food to gas to diapers to even car insurance to skyrocket, sometimes by upwards of 90% since January 2020. While inflation kept on rising and prices rose with it, wages slowed to historically weak levels.

Additionally, high government spending has caused inflation to skyrocket. During lockdowns, both the Trump and Biden administrations passed massive stimulus bills giving Americans checks of around $2,000, costing the government trillions of dollars. Already very high in debt, the government printed money to match costs, pouring too much currency into the economy and causing high inflation.

As a result, the Fed needed to increase interest rates. Starting in 2022, the Fed drastically increased interest rates from <1% to a cap of 5%, the highest rate since the 2008 Recession. Since late 2022, the Fed maintained these high rates to slowly produce beneficial results in reducing the growth of inflation.

Sure, inflation did sink from a peak of over 8% in many areas to almost 4%, however, these high rates caused economic growth to plummet. Because rates became so high, it has caused many companies, consumers, and the government from acquiring loans, reducing the amount of money in the economy. Due to poor company profits, many of these companies laid off millions of workers, leaving them forced to doing much less reliable side hustles in the Gig Economy. For the first time since 2020, unemployment rates started growing in 2024.

Thus, the Fed needed to cut rates to stimulate the economy again.

After a series of good inflation reports showing slowing prices growth, Fed chair Jerome Powell made an announcement at Jackson Hole in late August that rate cuts were being considered, and by early September, these rumors became certain. Fortunately, Powell and the Fed cut rates by half-of-a-basis-point, a very strong move toward reducing rates.

Markets for the rest of the week may start to skyrocket, as the Fed delivered on its promises, and by even more than expected. The best may be yet to come.

This is The Daily Drop's 100th article.