The U.S. Federal Reserve cut interest rates by a half a point on Wednesday, beginning the process of bringing the cost of borrowing down following more than four years of inflation and higher interest rates.
The Fed cut its federal funds rate by 0.5 percentage points to 4.75% to 5%. It was the first rate cut since 2020.
“The committee has gained greater confidence that inflation is moving sustainably toward 2%, and pledges that the risks to achieving its employment and inflation goals are roughly in balance,” the Federal Open Market Committee said in a statement on Wednesday.
Some interest rate cut was widely expected amid a cooling labor market and signs that generationally high inflation that hit the economy in the post-pandemic period was easing. Stocks initially rose on the news Wednesday before falling by the end of the day. Most restaurant stocks were down Wednesday.
The lower rate is unlikely to have an immediate impact on borrowing costs as it typically takes time for rate cuts to result in lower interest rates from lenders. But it signals an important shift after four years of soaring inflation and higher interest rates that challenged restaurant operators in the U.S. and around the world.
Higher interest rates had made it more expensive for operators to take on debt to pay for remodels and new locations. It also created problems in the market for mergers and acquisitions.
The higher cost of borrowing reduced the prices buyers could pay for restaurants and restaurant chains, which slowed the sale of many restaurant chains as sellers could no longer get the valuations they were once able to fetch.
The rate cut followed an August jobs report showing tepid hiring throughout the economy, though restaurants added 29,900 jobs in the month, or about one out of every five jobs.
It also followed a report showing the consumer price index fell to 2.5% over the past year, continuing a trend of slowing inflation.
Worth watching, however, is the state of the overall economy. The Fed raised rates aggressively starting in 2021 as consumer spending easily oustripped Americans’ ability or willingness to return to work, which created labor shortages throughout the economy and fueled higher labor costs, which led to higher prices.
Such aggressive interest rate increases usually create the conditions for a recession, as the higher interest rates reduce business spending, which results in fewer jobs and by extension lower labor costs.
But a recession has yet to take place. The U.S. Gross Domestic Product increased 1.4% in the first quarter and 3% in the second quarter, according to the Bureau of Economic Analysis. Many believe the U.S. will avoid a recession—meaning that the Fed will achieve a so-called “soft landing.”
“We view the Fed’s decision to start the easing cycle with a 50 basis point rate cut as more about making up for holding rates steady in July, rather than a signal of similarly jumbo-sized future moves,” Andy Schneider, senior U.S. economist at BNP Paribas, said in a note.
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