WASHINGTON (AP) — The Federal Reserve on Wednesday cut its benchmark interest rate by an unusually large half-point, a dramatic shift after more than two years of high rates that helped tame inflation but also made borrowing painfully expensive for American consumers.

The rate cut, the Fed’s first in more than four years, reflects its new focus on bolstering the job market, which has shown clear signs of slowing. Coming just weeks before the presidential election, the Fed’s move also has the potential to scramble the economic landscape just as Americans prepare to vote.

The central bank’s action lowered its key rate to roughly 4.8%, down from a two-decade high of 5.3%, where it had stood for 14 months as it struggled to curb the worst inflation streak in four decades. Inflation has tumbled from a peak of 9.1% in mid-2022 to a three-year low of 2.5% in August, not far above the Fed’s 2% target.

The Fed’s policymakers also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. And they envision four more rate cuts in 2025 and two in 2026.

In a statement, the Fed came closer than it has before to declaring victory over inflation: It said it “has gained greater confidence that inflation is moving sustainably toward 2%.” Wall Street initially welcomed the news, with stock prices rising modestly and bond yields falling.

“We know that it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation,” Fed Chair Jerome Powell said at a news conference.

Though the central bank now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers even further.

Rate cuts by the Fed should, over time, lead to lower borrowing costs for mortgages, auto loans and credit cards, boosting Americans’ finances and supporting more spending and growth. Homeowners will be able to refinance mortgages at lower rates, saving on monthly payments, and even shift credit card debt to lower-cost personal loans or home equity lines. Businesses may also borrow and invest more. Average mortgage rates have already dropped to an 18-month low of 6.2%, according to Freddie Mac, spurring a jump in demand for refinancings.

In an updated set of projections, the Fed’s policymakers now collectively envision a faster drop in inflation than they did three months ago but also higher unemployment. They foresee their preferred inflation gauge falling to 2.3% by year’s end, from its current 2.5%, and to 2.1% by the end of 2025. And they now expect the unemployment rate to rise further this year, to 4.4%, from 4.2% now, and to remain there by the end of 2025. That’s above their previous forecasts of 4% for the end of this year and 4.2% for 2025.

The Fed’s next policy meeting is Nov. 6-7 — immediately after the presidential election. By cutting rates this week, soon before the election, the Fed is risking attacks from Trump, who has argued that lowering rates now amounts to political interference. Yet Politico has reported that even some key Senate Republicans who were interviewed expressed support for a Fed rate cut this week.

The central bank’s officials fought against high inflation by raising their key rate 11 times in 2022 and 2023. Wage growth has since slowed, removing a potential source of inflationary pressure. And oil and gas prices are falling, a sign that inflation should continue to cool in the months ahead. Consumers are also pushing back against high prices, forcing such companies as Target and McDonald’s to dangle deals and discounts.

The Fed’s decision Wednesday drew the first dissent from a member of its governing board since 2005. Michelle Bowman, a board member who has expressed concern in the past that inflation had not been fully defeated, said she would have preferred a quarter-point rate cut.

After several years of strong job growth, employers have slowed hiring, and the unemployment rate has risen nearly a full percentage point from its half-century low in April 2023 to a still-low 4.2%. Once unemployment rises that much, it tends to keep climbing. Fed officials and many economists note, though, that the rise in unemployment this time largely reflects an influx of people seeking jobs — notably new immigrants and recent college graduates — rather than layoffs.

“The labor market is actually in solid condition,” Powell said at his news conference. “Our intention with our policy move today is to keep it there.”

At issue for the Fed is how fast it wants to lower its benchmark rate to a point where it’s no longer acting as a brake on the economy — nor as an accelerant. Where that so-called “neutral” level falls isn’t clear, though many analysts peg it at 3% to 3.5%.

Reporting by Christopher Rugaber, Associated Press.

WASHINGTON (AP) — The great inflation spike of the past three years is nearly spent — and economists credit American consumers for helping slay it.

Some of America’s largest companies, from Amazon to Disney to Yum Brands, say their customers are increasingly seeking cheaper alternative products and services, searching for bargains or just avoiding items they deem too expensive. Consumers aren’t cutting back enough to cause an economic downturn. Rather, economists say, they appear to be returning to pre-pandemic norms, when most companies felt they couldn’t raise prices very much without losing business.

“While inflation is down, prices are still high, and I think consumers have gotten to the point where they’re just not accepting it,” Tom Barkin, president of the Federal Reserve Bank of Richmond, said last week at a conference of business economists. “And that’s what you want: The solution to high prices is high prices.”

A more price-sensitive consumer helps explain why inflation has appeared to be steadily falling toward the Federal Reserve’s 2% target, ending a period of painfully high prices that strained many people’s budgets and darkened their outlooks on the economy. It also assumed a central place in the presidential election, with inflation leading many Americans to turn sour on the Biden-Harris administration’s handling of the economy.

The reluctance of consumers to keep paying more has forced companies to slow their price increases — or even to cut them. The result is a cooling of inflation pressures.

Other factors have also helped tame inflation, including the healing of supply chains, which has boosted the availability of cars, trucks, meats and furniture, among other items, and the high interest rates engineered by the Fed, which slowed sales of homes, cars and appliances and other interest rate-sensitive purchases.

Still, a key question now is whether shoppers will pull back so much as to put the economy at risk. Consumer spending makes up more than two-thirds of economic activity. With evidence emerging that the job market is cooling, a drop in spending could potentially derail the economy. Such fears caused stock prices to plummet a week ago, though markets have since rebounded.

This week, the government will provide updates on both inflation and the health of the American consumer. On Wednesday, it will release the consumer price index for July. It’s expected to show that prices — excluding volatile food and energy costs — rose just 3.2% from a year earlier. That would be down from 3.3% in June and would be the lowest such year-over-year inflation figure since April 2021.

And on Thursday, the government will report last month’s retail sales, which are expected to have climbed a decent 0.3% from June. Such a gain would suggest that while Americans have become vigilant about their money, they are still willing to spend.

Many businesses have noticed.

“We’re seeing lower average selling prices … right now because customers continue to trade down on price when they can,” said Andrew Jassy, CEO of Amazon.

David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, told investors that a more cost-conscious consumer has slowed its sales, which slipped 1% in the April-June quarter at stores open for at least a year.

“Ensuring we provide consumers affordable options,” Gibbs said, “has been an area of greater focus for us since last year.”

Other companies are cutting prices outright. Dormify, an online retailer that sells dorm supplies, is offering comforters starting at $69, down from $99 a year ago.

According to the Fed’s “Beige Book,” an anecdotal collection of business reports from around the country that is released eight times a year, companies in nearly all 12 Fed districts have described similar experiences.

“Almost every district mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items or shopping around for the best deals,” the Beige Book said last month.

Most economists say consumers are still spending enough to sustain the economy consistently. Barkin said most of the businesses in his district — which covers Virginia, West Virginia, Maryland and North and South Carolina — report that demand remains solid, at least at the right price.

“The way I’d put it is, consumers are still spending, but they’re choosing,” Barkin said.

In a speech a couple of weeks ago, Jared Bernstein, who leads the Biden administration’s Council of Economic Advisers, mentioned consumer caution as a reason why inflation is nearing the end of a “round trip” back to the Fed’s 2% target level.

Emerging from the pandemic, Bernstein noted, consumers were flush with cash after receiving several rounds of stimulus checks and having slashed their spending on in-person services. Their improved finances “gave certain firms the ability to flex a pricing power that was much less prevalent pre-pandemic.” After COVID, consumers were “less responsive to price increases,” Bernstein said.

As a result, “the old adage that the cure for high prices is high prices (was) temporarily disengaged,” Bernstein said.

So some companies raised prices even more than was needed to cover their higher input costs, thereby boosting their profits. Limited competition in some industries, Bernstein added, made it easier for companies to charge more.

Barkin noted that before the pandemic, inflation remained low as online shopping, which makes price comparisons easy, became increasingly prevalent. Major retailers also held down costs, and increased U.S. oil production brought down gas prices.

“A price increase was so rare,” Barkin said, “that if someone came to you with a 5% or 10% price increase, you almost just threw them out, like, ‘How could you possibly do it?’ ”

That changed in 2021.

“There are labor shortages, Barkin said. “Supply chain shortages. And the price increases are coming to you from everywhere. Your gardener is raising your prices, and you don’t have the capacity to do anything other than accept them.”

The economist Isabella Weber at the University of Massachusetts, Amherst, dubbed this phenomenon “sellers’ inflation” in 2023. In an influential paper, she wrote that “publicly reported supply chain bottlenecks” can “create legitimacy for price hikes” and “create acceptance on the part of consumers to pay higher prices.”

Consumers are no longer so accepting, Barkin said.

“People have a little bit more time to stop and say, ‘How do I feel about paying $9.89 for a 12-pack of Diet Coke when I used to pay $5.99?’ They don’t like it that much, and so people are making choices.”

Barkin said he expects this trend to continue to slow price increases and cool inflation.

“I’m actually pretty optimistic that over the next few months, we’re going to see good readings on the inflation side,” he said. “All the elements of inflation seem to be settling down.”

By Christopher Rugaber.