In an attempt to maintain stability in what seems to be a stable but declining economy, the Federal Reserve announced a quarter-point reduction in its key interest rate on Wednesday.
This is the third rate cut by the central bank in 2024. The Fed’s target rate is now between 4.25% and 4.5% as a result of the action.
The Fed now only anticipates two interest rate cuts in 2025, according to its statement announcing the move. The unemployment rate is still low, it said, while the inflation rate “remains somewhat elevated.”
The Fed’s actions are intended to keep the economy from overheating during periods of rapid expansion or plunging into a recession during periods of slower development.
The question of which is more likely to happen in the future is currently being hotly debated.
The rate of inflation is currently much lower than it was after the pandemic. However, the Bureau of Labor Statistics announced last week that the most closely followed inflation index, the 12-month Consumer Price Index, increased 2.7% in November, surpassing the 2.6% increase in the previous month.
Customers don’t appear to care.Retail sales increased 0.7% in the same month, according to the Census Bureau on Tuesday, exceeding estimates of 0.6%. The October result was raised up to 0.5% from 0.4%.
According to such statistics, the economy is still largely stable, but there are some indications of underlying problems that would support the Fed’s and President-elect Donald Trump’s desire for a more lenient monetary policy.
The labor market, where job growth has mostly concentrated in industries like state and local government and health care, is the most concerning. Usually, those industries don’t reveal anything about the state of the business cycle.
In the meantime, the rate of job creation in industries like manufacturing, business, and professional services—which often indicate sustained expansion—has essentially stagnated.
In general, hiring rates have drastically decreased, and the number of job opportunities is still declining.
Finally, certain market indices are reversing from their all-time highs following an amazing bull run that lasted for the most of 2024. Currently experiencing its worst multiday performance since the 1970s, the Dow Jones Industrial Average has been on a nine-day losing skid.
The majority of market participants currently maintain the view that the Fed would pause and hold rates stable at its January meeting after announcing its quarter-point decrease for December in order to evaluate the state of the global financial system.
Analysts are generally still optimistic about the situation as it is. According to a recent Bank of America study, the Fed still seems likely to achieve a gentle landing for the US economy, which is currently experiencing relatively low rates of inflation and unemployment.
Analysts at Goldman Sachs, however, predicted that inflation would have decreased even more by this point, albeit at the expense of somewhat higher unemployment.
In a chart that accompanied a recent note to clients, those analysts stated that the unemployment rate is no longer increasing as rapidly as it was earlier this fall. However, they stated that it is premature to draw the conclusion that the labor market’s overall statistics has steadied.
Even with a still-shaky labor market, Federal Reserve officialshave signaledthey may want to slow the pace of cuts soon not only in response to stickier inflation, but also given uncertainty about the incoming Trump administration s tariff policies.
The Goldman analysts cited a speech this month by Beth Hammack, president of the Federal Reserve Bank of Cleveland, outlining the current situation as evidence of the Fed’s thinking.
Resilient growth, a healthy labor market, and still-elevated inflation suggest to me that it remains appropriate to maintain a modestly restrictive stance for monetary policy for some time, Hammack said. Such a policy stance will help to sustainably return inflation all the way back to 2 percent in a timely fashion.
There has also been a broader rethinking about whether interest rates need to be higher in general given structural changes that may be occurring in the economy that have led to faster growth, like large fiscal deficits and elevated productivity growth.
Whereas the 2008 financial crash set the stage for more than a decade of low interest rates, Hammack said, some of the forces that appeared to be holding down the neutral rate following the Global Financial Crisis may have finally run their course or reversed.
Investor and economist sentiment has also become more unsure about what impact the Trump administration will have on the economy. In particular, fears about tariffs increasing prices have become widespread.
When it rains, it rains on everybody, Gary Millerchip, the CFO of Costco, said on the company s most recent earnings call.
Still, the base case appears to be relatively smooth sailing, thanks mostly to Trump s pro-business agenda. The Bank of America survey not only showed an eight-month high of 33% of respondents expecting the economy to continue to grow at a steady clip, but only 6% expect a recessionary scenario a six-month low. Meanwhile, overall investor sentiment remains super bullish, with funding allocation into stocks at highsand cash at lowson hopes for ongoing consumption and cheaper financing after Trump takes office.
Ironically, when sentiment gets to this level, it is usually a sell signal, Bank of America said in the note.
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