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.” According to a different paper issued by the Fed on Wednesday, central bankers now think it will take until 2026 to reach their targeted inflation rate of 2%.
According to Bloomberg’s survey of economists, three cuts were anticipated next year because they thought the economy and price rise would have further cooled by now.
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. It accomplishes this by altering the federal funds rate, which influences borrowing rates across the rest of the economy. The Fed aims to regulate the rate of economic growth by altering borrowing conditions.
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.
Federal Reserve officials have hinted that they may wish to decrease the rate of cuts shortly, despite the job market’s continued instability. This is due to both uncertainty regarding the trade plans of the incoming Trump administration and stickier inflation.
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.
“I think it’s still appropriate to maintain a modestly restrictive stance for monetary policy for some time,” Hammack said, citing robust GDP, a robust job market, and persistently high inflation. Such a policy position will contribute to the timely and sustainable return of inflation to 2 percent.
There has also been a more general reconsideration of whether interest rates should be raised in light of potential structural changes in the economy that have accelerated growth, such as significant fiscal deficits and high productivity growth.
Some of the mechanisms that seemed to be holding down the neutral rate after the Global Financial Crisis may have finally run their course or reversed, according to Hammack, even though the 2008 financial disaster set the foundation for more than ten years of low interest rates.
Concerns about the effects of the Trump administration on the economy have also grown among economists and investors. Particularly, there is now widespread concern that tariffs will raise prices.
During Costco’s most recent results call, CFO Gary Millerchip stated that when it rains, it rains on everyone.
However, the base case seems to be going rather smoothly, primarily because of Trump’s pro-business stance. According to the Bank of America study, only 6% of participants anticipate a recession, which is a six-month low, while 33% of respondents expect the economy to continue growing steadily. Investor mood is still extremely strong overall, with money being allocated to equities at high prices and cash at low prices in anticipation of continued consumption and lower financing costs after Trump assumes office.
Coincidentally, Bank of America stated in the note that when sentiment reaches this level, it is typically a sell signal.
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