NEW CITY, N.Y. - eTradeWire -- On Wednesday, the Federal Reserve made a significant policy shift by cutting interest rates by 0.5%, marking its first rate reduction since 2020. This decision brings the federal funds rate down to a range of 4.75% to 5.0% and signals the potential for two more rate cuts later this year, as indicated in the Fed's Summary of Economic Projections (SEP).

The stock market reacted with volatility to the news. Initially, major indices like the Nasdaq Composite and the S&P 500 rallied, but gains were later reversed, and they closed slightly down for the day. Investors seemed to have already priced in the possibility of a rate cut, leading to a muted overall reaction. Analysts suggest that the market had anticipated a "soft landing" for the economy, where inflation slows without triggering a recession.

Federal Reserve Chair Jerome Powell emphasized that the decision was proactive, stating it was "a sign of our commitment not to get behind." He reassured that the U.S. economy remains strong, with solid growth, declining inflation, and a robust labor market. Powell highlighted that the labor market indicators, such as the unemployment rate at 4.2%, high labor force participation, and wage growth returning to sustainable levels, support the view of a solid employment landscape.

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The rate cut decision was not unanimous; Fed Governor Michelle Bowman dissented, preferring a smaller cut of 0.25%. This dissent is notable as it's the first in two years and reflects differing views within the Fed on the appropriate pace of monetary easing.

The Fed's SEP and the "dot plot" suggest that most officials anticipate a total of 100 basis points in rate cuts this year, implying two more reductions of 0.25% each. The projections indicate a gradual easing cycle extending into 2025, aiming to balance the risks of inflation and employment.

Powell addressed concerns about cutting rates ahead of the upcoming U.S. presidential election, reaffirming the Fed's independence and commitment to serving the American people without political influence. He stressed that monetary policy decisions are made solely based on economic objectives, not political considerations.

Economists and market analysts have offered mixed reactions. Some caution that such a significant rate cut might signal underlying economic concerns, while others view it as a prudent step to sustain economic growth amid global uncertainties.