The Federal Reserve is starting to cut interest rates

The Federal Reserve cut interest rates by 50 basis points on Wednesday. | Photo: Shutterstock.

The U.S. Federal Reserve cut interest rates by half a percentage point on Wednesday, beginning the process of lowering borrowing costs after more than four years of inflation and higher interest rates.

The Federal Reserve cut the federal funds rate by 0.5 percentage points to 4.75%-5%. It was the first rate cut since 2020.

“The committee has become more confident that inflation is moving sustainably toward 2% and feels that the risks to achieving our employment and inflation goals are roughly balanced,” the Federal Open Market Committee said in a statement Wednesday.

The interest-rate cut had been widely expected amid a cooling labor market and signs that the generational inflation that has battered the economy in the post-pandemic era is easing. Stocks initially rose on the news Wednesday, then fell later in the day. Most restaurant shares fell Wednesday.

The lower rate likely won’t have an immediate impact on borrowing costs, since it typically takes time for rate cuts to trigger lower interest rates from lenders. But it signals an important shift after four years of soaring inflation and higher interest rates that have challenged restaurant operators in the U.S. and around the world.

Higher interest rates have made it more expensive for operators to take on debt for renovations and new locations. It has also created problems in the mergers and acquisitions market.

Higher borrowing costs have driven down the prices buyers can pay for restaurants and restaurant chains, which has slowed sales for many restaurant chains as sellers can no longer get the valuations they once could.

The rate cut came after the August jobs report showed modest employment gains across the economy, although restaurant jobs added 29,900 during the month, or about one in five jobs.

A report was also published showing that the consumer price index fell to 2.5% over the past year, confirming the downward trend in inflation.

But the state of the broader economy is worth watching. The Fed has aggressively raised interest rates since 2021 as consumer spending has easily crowded out Americans’ ability or willingness to return to work, creating labor shortages across the economy and raising labor costs, which has led to higher prices.

Such aggressive interest rate hikes usually lead to recessions because higher interest rates cause lower business spending, which results in fewer jobs and, consequently, lower labor costs.

But the recession hasn’t happened yet. U.S. gross domestic product grew 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 the Fed will achieve a so-called “soft landing.”

“In our view, the Fed’s decision to start its easing cycle with a 50 basis point cut is more a matter of compensating for the no-change rate in July, rather than a sign of similar large moves ahead,” Andy Schneider, senior U.S. economist at BNP Paribas, said in a note.

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Jonathan Maze, Restaurant Business Editor, is a longtime industry journalist who covers restaurant finance, mergers and acquisitions, and the economy, with a focus on fast food restaurants.

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