September marked the long-anticipated start of the US interest rate cutting cycle. Amid some uncertainty about the size of the cut heading into the meeting, the Fed lowered its policy rate by 50 basis points. The case for front-loading interest rate cuts makes sense, given the recent weakening in the labour market. With progress made on inflation, the Fed’s dual mandate shifted its focus to maintaining full employment, acting pre-emptively to prevent further rises in unemployment.
A larger rate cut carries risks, as it could be interpreted as a sign of panic. Historically, the Fed has cut by more than 25 basis points only during times of crises, such as the COVID-19 pandemic in 2020 and in the Global Financial Crisis of 2007 - 2008. However, the positive market response suggests that investors did not view the move as a panic signal.